Question

If changing the inventory valuation method from LIFO to FIFO, what will be the impact on the asset turnover ratio?

Answer 1

Effect of changing of inventory calculation methods from LIFO to FIFO will shows impact on asset turnover ratio :-

The effect is based on the trend of prices of inventory :-

If the prices of inventory is in increasing trend then the cost of inventory calculated under LIFO is less than the value of inventory calculated under FIFO.

At that situation if we change the method of valuation of inventory from LIFO to FIFO then the inventory will be valued at higher cost which leads to increase in value of total assets.

If there is increase in value of total assets then the impact on asset turnover ratio is decreasing

It means if the value of assets increases automatically the asset turnover ratio will decreased.

So, in this situation the asset turnover ratio will decreased.

If the prices of inventory is in decreasing Trend then the cost of inventory calculated under LIFO is greater than the cost of inventory calculated under FIFO.

Under this decreasing trend situation if we change the method of calculation of inventory from LIFO to FIFO then there will be a decrease in value of closing inventory.

In this situation the value of inventory decreases then the value of total assets will get decreased and automatically the asset turnover ratio will be increased.

So, in this situation the turnover ratio gets increased

Summary, impact on asset turnover ratio by changing the inventory calculation method from LIFO to FIFO :-

If prices of inventory decreases the asset turnover ratio increases.

If prices of inventory increases the asset turnover ratio decreases.

These all the information required to solve the above given question.

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