Question

Exercise 5-18 (Algo) Comparing LIFO numbers to FIFO numbers; ratio analysis LO A3 Cruz Company uses LIFO for inventory costing and reports the following financial data. It also recomputed inventory and cost of goods sold using FIFO for comparison purposes Year 1 $ 220 790 245 LIFO inventory LIFO cost of goods sold FIFO inventory FIFO cost of goods sold Current assets (using LIFO) Current assets (using FIFO) Current liabilities Year 2 $ 270 850 340 805 330 400 186 300 925 160

Answer 1

The student's question relates to comparing financial data using LIFO and FIFO inventory costing methods and analyzing their effects on financial ratios like the current ratio. It demonstrates how the choice of inventory valuation can impact financial statements.

Step-by-step explanation:

The student's question involves analyzing financial data to compare the impact of using the Last-In-First-Out (LIFO) inventory costing method versus the First-In-First-Out (FIFO) method on financial statements and ratio analysis. Specifically, the student is asked to look at Cruz Company's financial data which includes LIFO and FIFO inventories, cost of goods sold (COGS), current assets, and current liabilities over two years. This comparison will help in understanding how inventory valuation methods affect the reporting of financial information.

When companies calculate financial ratios, such as the current ratio which is calculated by dividing current assets by current liabilities, the choice of inventory costing method can have a significant effect on the results. LIFO numbers tend to show lower inventory values during periods of rising prices, which can result in a lower current ratio compared to FIFO, which typically reports higher inventory values leading to a higher current ratio.