CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

A firm uses FIFO to account for its inventory. Recently it found out the market price (of its inventory goods) has gone up by 10%. To reflect the future utility (revenue-producing ability) of the inventory, the firm should ______

A. adjust inventory 10% higher to reflect the current market prices.
B. adjust COGS 10% higher to reflect the current market prices.
C. change to LIFO to take advantage of tax savings.
D. make no adjustments.
Correct Answer: D

According to the lower-of-cost-or-market theory, the firm should not make any adjustments when the replacement market prices are higher than the current value for inventory.

User Contributed Comments 8

User Comment
sarath Important Funda: No adjustment when the replacement prices at market are higher than the current value of inventory.
cong Under US GAAP, no adj is required if market price rises above historical cost.
Yohan3109 I guess COGS adjust automatiquely so no need to make adjustement because it's reflect the expense for the current year related to the sale. Is that correct?
quanttrader since firm is using FIFO, then newer inventory will remain and reflects current market prices. therefore, no adj.
johntan1979 Funda... learnt a new word today :)
endurance the lower-of-cost-or-funda-theory
choas69 both IFRS and US GAAP make no adjustments.
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