- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 6. Analysis of Inventories
- Subject 1. Inventory Valuation
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 ______
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.
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 |
| Yrazzaq88 | MARKET PRICE = US GAAP US GAAP = NO ADJUSTMENTS !!! |
| choas69 | both IFRS and US GAAP make no adjustments. |