Company A uses the FIFO method to account for inventory and Company B uses the LIFO method.
Question:
Company A uses the FIFO method to account for inventory and Company B uses the LIFO method. The two companies are exactly alike except for the difference in inventory cost flow assumptions. Costs of inventory items for both companies have been rising steadily in recent years, and each company has increased its inventory each year. Ignore tax effects.
Required:
Identify which company will report the higher amount for each of the following ratios.
1. Net profit margin ratio
2. Earnings per share ratio
3. Inventory turnover ratio
4. Current ratio
5. Debt-to-equity ratio
Step by Step Answer:
For two companies that are exactly alike in times of rising prices and increasing inventory levels c...View the full answer
Financial Accounting
ISBN: 9781264229734
11th Edition
Authors: Robert Libby, Patricia Libby, Frank Hodge
Related Video
Inventory turnover is a key metric that helps businesses evaluate the efficiency of their operations. A high turnover ratio is generally considered positive, indicating that the company is effectively selling its inventory and making efficient use of its resources. On the other hand, a low turnover ratio may indicate issues such as overstocking or slow sales and may require further examination to identify and address the underlying causes. Businesses use this ratio to make decisions about inventory levels, production schedules, and pricing strategies. It also helps businesses to identify areas where they may need to make improvements, such as reducing lead times for production or optimizing sales and marketing efforts. Additionally, inventory turnover is used by investors and analysts as a key performance indicator to evaluate the financial health and growth potential of a company.
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