The LIFO inventory costing method results in the acid-test ratio being overstated.

Question

Quizplus · Accepted Answer

The LIFO inventory costing method results in the acid-test ratio being understated, not overstated. This is because LIFO assumes that the most recent inventory items purchased are the first to be sold, which means that the value of the inventory on the balance sheet is likely to be understated compared to the market value. As a result, the acid-test ratio, which is a measure of a company's short-term liquidity, is also understated because it excludes inventory from the calculation.

The LIFO Inventory Costing Method Results in the Acid-Test Ratio