Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising inventory costs, which of the following is true of Company A compared to Company B?
1. Company A's gross profit is lower and inventory turnover is higher.
2. Company A's gross profit is lower and inventory turnover is lower.
3. Company A's gross profit is higher and inventory turnover is lower.
4. Company A's gross profit is higher and inventory turnover is higher.

Under first in first out (FIFO) inventory valuation, the inventory purchased first i.e at the beginning of the period is issued first while under last in first out (LIFO) valuation, the inventory purchased last i.e latest purchase is issued first.

In case of inflation and higher costs, the units purchased last i.e recently would be more costlier than the units purchased initially. In such a case, if first in first out is followed, the cost of goods sold would be lower and thus gross profit would be more.

Inventory Turnover Ratio = [tex]\frac{Cost\ of\ goods\ sold}{Average\ Stock}[/tex]

Thus, in case of FIFO, average stock would be more since lower cost inventory is issued. Hence, Inventory turnover would be lower.