During a period of rising prices and inventories, a company whose current ratio is dangerously close to the minimum specified by agreement with a major creditor would prefer which cost flow assumption?

Question

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Under FIFO (First In, First Out), the oldest costs are assigned to the cost of goods sold, which, during a period of rising prices, means lower costs are matched against revenues compared to LIFO or Average cost methods. This results in higher reported profits and, consequently, a higher current ratio, which would be beneficial for a company close to violating minimum current ratio covenants with creditors.

During a Period of Rising Prices and Inventories, a Company