Ford Motor Company uses LIFO to account for all of its domestic inventories. A note to the company’s financial statements indicated that:
If the FIFO method had been used instead of the LIFO method, inventories would have been higher by over a billion dollars.
a. Indicate whether each of the following financial measurements would have been higher, lower, or unaffected had Ford Motor Company used FIFO instead of LIFO. Explain the reasoning behind your answers.
1. Gross profit rate.
2. Reported net income.
3. Current ratio (Ford’s current ratio is greater than 1 to 1).
4. Inventory turnover rate.
5. Accounts receivable turnover rate.
6. Cash payments made to suppliers.
7. Net cash flow from operations (Ford’s operating cash flows are positive).
b. Provide your own assessment of whether using LIFO has made Ford Motor Company more or less (1) liquid and (2) well-off. Defend your answers.