- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 6. Analysis of Inventories
- Subject 3. Presentation and Disclosure
CFA Practice Question
When purchases exceed sales for the current year in a period of falling prices, profits reported under LIFO will be ______
B. greater than profits reported under FIFO.
C. the same as profits reported under average cost.
A. lower than profits reported under FIFO.
B. greater than profits reported under FIFO.
C. the same as profits reported under average cost.
Correct Answer: B
When purchases exceed sales, ending inventory will increase for the period. If LIFO is used, the recent prices, which are falling, will be included in the cost of goods. Under FIFO, the result is the opposite: the newer, lower prices will be included in ending inventory. Thus, LIFO profits will be greater than FIFO profits.
User Contributed Comments 3
| User | Comment |
|---|---|
| surob | I guess it depends whether the most current prices are lower than the oldest ones. In other words, it depends how much the current prices fall and whether it will be lower than previous older prices. For the exam, if not given, always assume the price is rising. |
| Paulvw | Falling prices! |
| quanttrader | tricky - falling prices. Otherwise in normal inflationary environment, the LIFO layers will accumulate and COGS will be greater implying lower profit than FIFO. Opposite in deflationary environment. |