- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 25. Inventories
- Subject 1. Cost of Inventories
CFA Practice Question
Including costs in inventory that should be expensed will ______
A. overstate profitability and inventory.
B. overstate profitability and understate inventory.
C. understand profitability and overstate inventory.
Explanation: This will overstate profitability because of the inappropriate deferral of cost recognition.
User Contributed Comments 3
| User | Comment |
|---|---|
| vinoth84 | Could someone explain this? |
| schweitzdm | If you don't remove costs from inventory the value will be higher than it should be. Since you failed to recognize appropriate expenses you will appear to be making extra profits. |
| rjdelong | Extra costs in INV -> higher INV -> higher Assets -> higher Equity -> higher NI Another way to think about it is that these costs were not expensed which lowers costs -> higher profitability |