LIFO vs. FIFO: Impact on Working Capital, Taxes, and Current Ratio

LIFO vs. FIFO: Comparison and Analysis

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Question

Under an inflationary, LIFO environment with stable inventories, which of the following is true compared to FIFO?

Working Capital Taxes Current Ratio

I. Higher Lower Lower -

II. Lower Lower Lower -

III. Higher Lower Lower -

IV. Lower Higher Higher -

Answers

Explanations

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A. B. C. D.

A

With rising prices and stable inventories, the COGS is higher under LIFO than under FIFO, thus lower net income and lower taxes. Ending inventory is valued lower under LIFO than under FIFO and hence, a lower current asset value and lower working capital and current ratio.

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