Company A uses lifo and Company B uses fifo for inventory valuation. Otherwise,

Question

• Company A uses lifo and Company B uses fifo for inventory valuation. Otherwise, the firms are of similar size and have the same revenue and expenses. Assuming inflation, analyze liquidity and profitability of the two firms. Which of the following will hold true?
  • It is impossible to compare two firms with different inventory methods.
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  • Company B will have relatively higher profit and higher inventory turnover.
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  • Company B will have relatively higher profit and lower inventory turnover.
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  • Company A will have a higher current ratio and acid test ratio, with the same profit.
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  • Company B will have relatively higher profit and a higher current ratio.

Explanation / Answer

Company B will have relatively higher profit and lower inventory turnover.

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