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Financial Reporting and Analysis Q249

0. A company decides to change its inventory method from FIFO to the weighted average cost method. If the inventory prices are decreasing during this period, which of the following financial ratios will most likely decrease as a result of this change?

  • Option : A
  • Explanation : All else held constant, in a period of declining costs the ending inventory would be higher under weighted average and cost of goods sold (COGS) will be lower (compared to FIFO) resulting in higher net income and retained earnings. There will be no impact on the debt level, current or long-term. Therefore the debt-to-equity ratio (Total debt ÷ Total shareholder’s equity) will decrease due to the increase in retained earnings (and higher shareholders’ equity).
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