LIFO/FIFO following, general, seeing

Spongebob

In general, when analyzing profitability and costs, or when analyzing asset and equity ratios, which of the following should be used?

Profitability/Cost Ratios Asset/Equity Ratios


A) FIFO FIFO


B) LIFO FIFO


C) FIFO LIFO


the right answer is B)......but why is it B? does LIFO end in lower Net Income and higher COGS????

should it be A)...seeing as it results in higher Net Income...therefore incresing profitablility ratios? like GPM and Net Profit Margin?

burnsy562000

ahhhhh...i get it....i was looking at it from the MAKER of the Financial Statements....when i shuold have been loking at through the eyes of the user....

THANKS GUYS/GALS!!!! appreciate the help!!!

MythosHF

gooner and super are right, but also as a side note: this seems to be a common testing problem. the cfai loves to test on "mixed" ratios (ratios that pull a number from the I/S and a number from the B/S). So know that whenever you're pulling a number from the I/S you want to use LIFO because it reflects a current COGS, whereas when you pull a number from the B/S, you want to use FIFO because it more accurately reflects inventory.

Flok

I am slightly confused by your question, seeing as there are 3 ratios being asked about and only two choices in each answer-----but, you should take the most conservative approach. Since LIFO gives lower NI, and FIFO gives lower Assets, B makes sense.

evolsteevol

The objective is not to produce the highest net income. You want to produce net income that is most likely to be indicative of future results, and running current inventory costs thru CGS is done with LIFO