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
E) identical; remain the same

Question

Quizplus · Accepted Answer

In an inflationary environment, a firm using LIFO (Last In, First Out) will report lower inventory values and higher cost of goods sold than a firm using FIFO (First In, First Out), leading to lower net income and a lower current ratio. Over time, as inflation continues, the difference in reported inventory values between LIFO and FIFO increases, further lowering the current ratio for the LIFO firm compared to the FIFO firm.

Assuming Continued Inflation, a Firm That Uses LIFO Will Tend