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Question

In a period of falling prices, a firm reporting under LIFO compared to reporting under FIFO, will have a higher ______

A Cost of sales Correct Answer Incorrect Answer
B Gross profit margin Correct Answer Incorrect Answer
C Inventory turnover ratio Correct Answer Incorrect Answer
D Current ratio Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

With falling prices, LIFO COGS (Cost of Goods Sold) will include the cost of lower-priced inventory and COGS will be less as compared to FIFO COGS. Because of this, the firm reports a higher gross profit margin (Gross Profit/sales) under LIFO than under FIFO, while LIFO inventory will be higher and inventory turnover lower. 

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