Assuming continued inflation, a firm that uses LIFO will tend to have a(n) ________current ratio than a firm using FIFO, and the difference will tend to __________ as time passes.
A)higher; increase
B)higher; decrease
C)lower; decrease
D)lower; increase

Question

Quizplus · Accepted Answer

If a firm uses LIFO (Last-In, First-Out) method, the cost of goods sold will reflect the current, higher prices of goods. This means that the value of the inventory will be lower and the current ratio, which is current assets divided by current liabilities, will be lower. As time passes and inflation continues, the difference between the LIFO and FIFO methods will increase, further decreasing the current ratio of the firm using LIFO. Therefore, the correct answer is D, lower current ratio and increase difference over time.

Assuming Continued Inflation, a Firm That Uses LIFO Will Tend