CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Which statement(s) is (are) true?

I. Under the FIFO method of inventory valuation, the assignment of costs to merchandise sold is in the same order in which the merchandise was purchased.

II. The FIFO method of inventory valuation is based on an assumption that the most recent costs incurred should be charged against current-year revenues.

III. The FIFO method of inventory valuation is based on the assumption that costs should be charged against revenues in the same order in which the costs were incurred.

IV. LIFO is considered the most conservative inventory pricing method.
A. I, II and III
B. I, II and IV
C. I, III and IV
Explanation: I. FIFO means "first-in, first-out" -the first items purchased are the first items sold. Inventory costs are assigned to the merchandise sold in the same order in which the purchases of merchandise were made.

II. Under FIFO, costs are charged in the order in which they occur, but the most recent inventory costs (purchases) are assigned to ending inventory. Inventory does not become a "cost" until it is sold.

III. FIFO means "first-in, first-out", in other words, the cost of the first items purchased becomes the cost of the first items sold.

IV. With a LIFO pricing system, inventory is valued at the oldest costs (usually the lowest because of inflation) and the values of the recent purchases (slightly higher costs) are assigned to the cost of goods sold. With higher costs of goods there will be a lower net income.

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