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MC Qu. 13-138 Company A uses the FIFO inventory... Company A uses the FIFO inventory method...

MC Qu. 13-138 Company A uses the FIFO inventory...

Company A uses the FIFO inventory method and Company B uses the LIFO method. If prices are rising and there are no other significant differences between the companies, which of the following is correct?

Multiple Choice

Company A will report a higher current ratio and lower earnings per share than Company B.

Company A will report a higher current ratio and higher earnings per share than Company B.

Company A will report a lower current ratio and higher earnings per share than Company B.

Company A will report a lower current ratio and lower earnings per shares than Company B.

q.30

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Answer #1

Answer: Option (b). Company A will report a higher current ratio and higher earnings per share than Company B.

Reasoning: Since company A uses FIFO so due to increase in price it will report higher ending inventory under this method than Company B, because new units remains unsold under FIFO method and these new units would have been purchased at higher price. And due to higer ending inventory its current assets will be higher and as a result Current ratio will also be higher.

And we know that COGS = Beg. inventory + purchases - Ending inventory. Thus, Company A will have lower COGS due to higher ending inventory which will result higher net income and therefore EPS of Company A will also be higher than Company B.

Hence, Company A will report higher current ratio and higher EPS than Company B

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