During a period of rising inventory costs, a company decides to change its inventory method from FIFO to the weighted average cost method. Which of the following financial ratios will most likely increase as a result of this change?
B is correct. All else held constant, in a period of rising costs the ending inventory would be lower under weighted average and cost of goods sold (CGS) will be higher (compared to FIFO) resulting in lower 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 increase due to the decrease in retained earnings (and lower shareholders’ equity).