CFA Practice Question

CFA Practice Question

When analyzing the balance sheet, which of the following is an argument against using LIFO in times of rising prices?
A. Under LIFO, ending inventory is valued at the oldest prices, an unrealistic valuation.
B. Under LIFO, ending inventory will be overstated.
C. Neither of these answers is correct.
Explanation: LIFO values ending inventory at the oldest prices, thus in times of rising prices, inventory will be understated. This results in reporting an unrealistic valuation of the company's inventory.

User Contributed Comments 7

User Comment
shasha purchase returns: return to suppliers sales returns: returned by clients
steved333 I thought LIFO reflected the most realistic value of COGS during rising prices. Wouldn't that necessarily mean the same for the ending inventory???
jackwez LIFO would make COGS correct, but the inventory would still be under valued.. if all inventory was worth the last price you paid vs you bought everything a year a go at half the price.
steved333 Hmmm. Makes sense. Thx.
kritan surely there is a world of difference between 'understated' and 'unrealistic'? one could even argue that the latter contradicts the conservatism of LIFO inventory on the balance sheet.
thebkr7 This video explains why perfectly
http://www.investopedia.com/video/play/inventory-fifo-lifo/
CalebMast @thebrk7, that video was extremely helpful. Thank you
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