Question：
In a period of rising prices, when compared with a company that uses weighted average cost for inventory, a company using FIFO will most likely report higher values for its:
A. debt-to-equity ratio.
B. return on sales.
C. inventory turnover.
Answer = B
In periods of rising prices, FIFO results in a higher inventory value and a lower cost of goods sold and thus a higher net income. The higher net income increases return on sales. The higher reported net income also increases retained earnings and thus results in a lower debt-to-equity ratio, not a higher one. The combination of higher inventory and lower cost of goods sold (CGS) decreases inventory turnover (CGS/Inventory)
CFA Level I
“Inventories,” Michael A. Broihahn
Sections 3.2, 3.3, 3.5, 3.7
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