CFA Practice Question

There are 520 practice questions for this study session.

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
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