An entity changed from the FIFO to the LIFO cost flow assumption for inventories.Assuming that inventory and sales remain constant over time,and that prices are rising,how would the current ratio be changed as a result of converting from FIFO to LIFO?
A) The current ratio did not change.
B) The current ratio increased.
C) The current ratio decreased.
D) The effect on the current ratio cannot be determined from the information given.

Question

Quizplus · Accepted Answer

When a company changes from FIFO to LIFO, the cost of goods sold increases and the value of ending inventory decreases, resulting in a lower current ratio. This is because under LIFO, the cost of the more recently acquired inventory is matched with sales, resulting in a higher cost of goods sold and lower ending inventory value. Lower inventory value means a lower current asset balance, resulting in a lower current ratio.

An Entity Changed from the FIFO to the LIFO Cost