Analyzing the Impact of Alternative Inventory Methods on Selected Ratios
Company A uses the FIFO method to cost inventory, and Company B uses the LIFO method. The two companies are exactly alike except for the difference in inventory costing methods. Costs of inventory items for both companies have been rising steadily in recent years, and each company has increased its inventory each year. Each company has paid its tax liability in full for the current year (and all previous years), and each company uses the same accounting methods for both financial reporting and income tax reporting.
Required:
Identify which company will report the higher amount for each of the following ratios. If it is not possible, explain why.
1. Current ratio.
2. Quick ratio.
3. Debt-to-equity ratio.
4. Return on equity.
5. Earnings per share.
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