A change from FIFO to LIFO in a period of rising prices will
A)decrease both the current ratio and the inventory turnover ratio.
B)increase both the current ratio and the inventory turnover ratio.
C)increase the current ratio and decrease the inventory turnover ratio.
D)decrease the current ratio and increase the inventory turnover ratio.

Question

Quizplus · Accepted Answer

In a period of rising prices, switching from FIFO (First In, First Out) to LIFO (Last In, First Out) accounting for inventory will generally result in lower ending inventory values on the balance sheet because the cost of goods sold (COGS) will be higher with LIFO (as it assumes the latest, and thus more expensive, inventory items are sold first). This leads to a decrease in the current ratio (current assets/current liabilities) because inventory is a component of current assets. Meanwhile, the inventory turnover ratio (COGS/average inventory) will increase because the denominator (average inventory) decreases while COGS increases, indicating a faster turnover of inventory.

A Change from FIFO to LIFO in a Period of Rising