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Iginla2011

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发表于 2013-4-17 17:47 | 只看该作者

high inflation SR LIFO Vs FIFO Question

first, run, difference, decrease, relative
Assuming high inflation in the short run and lower levels of inflation in the long run, the current ratio of a company using last in, first out (LIFO) relative to a firm using first in, first out (FIFO), will be:
A) lower, and the difference between the two firms’ current ratios will decrease as inflation decreases.
B) higher, and the difference between the two firms’ current ratios will decrease as inflation decreases.
C) lower, and the difference between the two firms’ current ratios will increase as inflation decreases.
I have opted for A, becoz difference mainly comes from inventory (FIFO the current inventory vs LIFO old inventory), as inflation decreases, the difference between the two firms’ current ratios will also decrease.
However, the correct answer was C) lower, and the difference between the two firms’ current ratios will increase as inflation decreases.
Reference Schweser Question ID#: 94071
Could anyone explain why?
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Matori

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发表于 2013-4-17 17:47 | 只看该作者
The difference never of current ratio will not decreae because LIFO and FIFO react in an oppposite way under rising price or declining price.
So if the price rises, the differrence between the two firm current ration will rise(in absolute term): LIFO FIFO increase but the difference is a positive number
Now if the price declines LIFOFIFO will continue to increase but the difference is a negative number.(considering that we are talking about the long run)
In conclusion, in absolute termn,under rising of falling prices, the difference of current ration between LIFO and FIFO will rise
ANSWERS IS: C
PSin the short run the correct answer would have been A)

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invic

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发表于 2013-4-17 17:47 | 只看该作者
The rate of inflation reduces in the long run, but it is still an inflationary environment. It is still inflation though. You probably thought it meant deflation, or lower CPI in later environments. It should say “gap of CR will continue to increase at a lower rate”. Second derivatives.

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