Question

In a period of rising prices and stable inventory quantities, which of the following is most likely?

a) Profitability ratios are lower under FIFO.
b) Solvency ratios are higher under FIFO.
c) Activity ratios are lower under FIFO.
d) Profitability ratios are higher under FIFO.

Answer 1

In a period of rising prices and stable inventory quantities, profitability ratios are higher under FIFO.

Step-by-step explanation:

When prices are rising and inventory quantities are stable, the use of the FIFO (First-In, First-Out) method is likely to result in higher profitability ratios. This is because under the FIFO method, the cost of goods sold is calculated using the price of the oldest inventory, which tends to be lower. As a result, the gross profit is higher, leading to higher profitability ratios such as gross profit margin and net profit margin.