Effect of different methods on financial items

Impact of LIFO (versus FIFO) when prices are rising, inventory is rising or stable*

	LIFO	FIFO
CFO	Higher (more positive) due to lower taxes	Lower
CFI	No impact	No impact
Net cash position	Higher (more positive) due to lower taxes	Lower
Inventory/Working capital (current asset – current liability)	Higher (more positive) due to lower taxes	Higher
Assets	Lower Due to lower inventory	Higher
Liabilities	No impact	No impact
Equity	Lower Due to lower income	Higher
COGS	Higher	Higher
Taxes	Lower Due to lower EBT	Higher
Net Income	Lower as higher COGS outweigh lower tax	Higher
Profitability (ROE, ROA)	Lower -Lower NI outweighs lower equity	Higher
Leverage (Debt/Equity)	Lower Due to lower inventory	Higher
Inventory turnover	Higher as higher COGS and lower inventory	Lower

Average-cost method
Since it's an average, it would be in between LIFO and FIFO.

LIFO Liquidation
Occur when the balance of inventory declines from the beginning to the end of the period and allow low-cost LIFO inventory layers to flow to COGS. Then, COGS is unusually low, profits and taxes are unusually high.

Conservative practice in ratio analysis:
Use LIFO for profitability ratio & cost ratio and FIFO for liquidity ratio, solvency, asset/equity ratio. For activity (inventory turnover – LIFO for COGS / FIFO for inventory)