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

Question

Quizplus · Accepted Answer

Under FIFO (First-In, First-Out), the oldest inventory costs are assigned to the cost of goods sold, which, during a period of rising prices, would result in lower cost of goods sold and higher reported profits. This would improve the company's equity, thus improving the debt/equity ratio and helping the company stay within the limits specified by agreements with creditors.

During a Period of Rising Prices and Inventories, a Company