CFA Practice Question

CFA Practice Question

A company reports its asset turnover ratio as 2.5 on the basis of the LIFO method of inventory valuation. The analyst is interested in comparing the company's performance to a peer company which reports its results on the basis of the FIFO method. Upon conversion to the FIFO method, which of the following asset turnover ratios is NOT likely to result from the analyst's restatement, if prices are rising?
A. 2.1
B. 2.6
C. 2.5
Explanation: Under rising prices, FIFO would value inventory at current prices, or higher, than LIFO would. As a result of higher balance sheet asset values under FIFO, asset turnover would decrease from 2.5 as reported under LIFO. Thus, 2.6 is an unlikely value.

User Contributed Comments 3

User Comment
andrewmorgan and we assume prices are rising because?
mc42086 Last 4 words of question. If prices are rising...
GBolt93 on another note though, I'm pretty sure you always assume rising prices unless told otherwise.
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