If the company changes from FIFO to LIFO during a period of rising prices, its ending inventory value will decrease. This is because under LIFO the ending inventory is made up of the oldest items in inventory and these are cheaper in a period of rising prices. Also, the cost of goods sold will increase because the company is now selling the newer, more expensive items in inventory. Inventory turnover is calculated as cost of goods sold divided by the average inventory. Since this change to LIFO would increase the numerator and decrease the denominator, this ratio will increase as a result of the change.
If the company changes from FIFO to LIFO during a period of rising prices, its ending inventory value will decrease. This is because under LIFO the ending inventory is made up of the oldest items in inventory and these are cheaper in a period of rising prices. Also, the cost of goods sold will increase because the company is now selling the newer, more expensive items in inventory. Since inventory is part of the numerator of the current ratio and it is now smaller, the current ratio for the company would be reduced if it switched from FIFO to LIFO.
The cash flows of the company are not affected by the method of inventory tracking.
The debt-to-equity ratio is not directly affected by the method of inventory tracking that is used. However, it is affected through a higher or lower profit from the sale of inventory. If the company switched to LIFO, they would have a higher cost of goods sold and this will decrease profits. The lower profits will decrease equity, which would increase the debt-to-equity ratio.
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