CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

How should gross profit be adjusted to account for the illusory income effect associated with LIFO liquidation?

A. Add back the before-tax LIFO liquidation amount.
B. Subtract the before-tax LIFO liquidation amount.
C. Subtract the after-tax LIFO liquidation amount.
Correct Answer: B

By subtracting the before-tax LIFO liquidation amount from the gross profit (which is a before-tax amount), the analyst can determine the portion of gross profit that is sustainable.

User Contributed Comments 3

User Comment
kalps LIFO liquidation implies that the gross profit is higher than it should be as it is based on old ost base, hence the liquidation amount should be subtracted from the cost base in order to give a realistic lower profit.
shasha Should no LIFO liquidation happen, do we need to illustrate its effect on GP, which is "clean" from too old stock?
mtcfa The answer is equivalent to saying "increase COGS by adding back the decline in the LIFO reserve."
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