Question

What is the impact of the changing in prices on the value of the inventories and ratio analysis? In your answer provide a comparison between FIFO and LIFO through a numerical example.

Answer 1

FIFO And LIFO are the two methods of valuation of inventories.
Under LIFO it is assume that invetory which was purchased last would sold first
Vice versa under FIFO method it is assume that inventory which was purchased first woulld sold first.
What is the impact of the changing in prices on the value of the inventories and ratio analysis?
When prices are increasing significantly , LIFO when compared to FIFO will cause lower inventory
costs on the balance sheet and a higher cost of goods sold on the income statement.
For Example:
Purchase	Units	Rate Per Unit
01-Jan	100	10
02-Jan	100	15
03-Jan	100	20
Sales	Units	Rate per unit
03-Jan	200	30
In above example Inventory Value under :
LIFO :	100 Units *10 per unit = $1000
FIFO:	100 Uniits *$20 per unit =$2000
This will mean that the profitability ratios will be smaller under LIFO than FIFO.
The profitability ratios include profit margin, return on assets, and return on stockholders' equity.
The inventory turnover ratio will be higher when LIFO is used during periods of increasing costs.
The reason is that the cost of goods sold will be higher and the inventory costs will be lower under LIFO than under FIFO.
You Can take vise-versa