CFA Practice Question
Which of the following combinations of accounting practices will lead to the highest reported earnings in an inflationary environment in the earlier years?
Depreciation Method; Inventory Method
A. Straight line; LIFO
B. Double declining balance; LIFO
C. Straight line; FIFO
Explanation: FIFO yields the lowest COGS (thus, higher income) due to its use of the oldest pricing, straight-line depreciation applies an even distribution of depreciation expense over the life of the asset, and double-declining balance applies higher depreciation expense in the earlier years.
User Contributed Comments 3
| User | Comment |
|---|---|
| Creep | Bah! I assumed NET INCOME! |
| SKIA | Even if you assumed Net Income, FIFO still has higher NI. |
| GBolt93 | And tax savings from double declining don't offset the additional expense. |