A company's decision to switch from FIFO to LIFO inventory accounting affects which of the following ratios when comparing financial results of the company using the two different methods?
A) Quick ratio
B) Gross profit margin
C) Accounts receivable turnover

Question

Quizplus · Accepted Answer

Switching from FIFO (First-In, First-Out) to LIFO (Last-In, First-Out) inventory accounting primarily affects the cost of goods sold (COGS). Since LIFO assumes that the most recently acquired inventory is sold first, in times of rising prices, LIFO will result in higher COGS and lower ending inventory compared to FIFO. This directly impacts the gross profit margin, which is calculated as (Sales - COGS) / Sales. The change in COGS under LIFO, therefore, affects the gross profit margin. The quick ratio and accounts receivable turnover are not directly affected by inventory accounting methods as they focus on liquidity and efficiency in collecting receivables, respectively.

A Company's Decision to Switch from FIFO to LIFO Inventory