CFA Practice Question

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CFA Practice Question

Which of the following is an advantage of LIFO inventory valuation over FIFO during periods of falling prices (assuming not all inventory is sold)?

A. Ending inventory on the balance sheet is reported at its current replacement cost.
B. Tax savings associated with lower reported earnings
C. It more closely adheres to the matching principle.
D. It more closely parallels the physical flow of goods sold.
Correct Answer: C

LIFO costing uses the most recent costs to compute cost of goods sold. Assuming costs are changing, these costs more closely match a firm's revenue, which usually matches the trend of cost changes.

User Contributed Comments 9

User Comment
stranger a. ending inventory on the balance sheet is reported at the first in cost under LIFO. b. since prices are falling LIFO would show higher profits and hence higher taxes. c. LIFO MATCHES CURRENT PERIOD COSTS TO CURRENT REVENUE. D. physical flow of good might involve use of older stock but LIFO accounts for costs using last in.
vincenthuang b is correct when the price goes up
danlan In Period of falling prices, COGS is higher under LIFO and earnings are higher under LIFO, so tax is higher under LIFO, B is wrong.
jwubcsb Just a minor correction danlan. In a period of falling prices COGS is LOWER under LIFO resulting in higher income which also means higher taxes.
mtcfa C is correct under all conditions. LIFO is best indicator of allocating costs to revenue.
hizmo "falling" prices.
cleopatraliao thanks jwubcsb:D
quanttrader prices are falling, and for LIFO lower cogs
Shaan23 I agree with mtcfa. Key point. Regardless of rising or falling prices C is correct.
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