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 |