CFA Practice Question

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CFA Practice Question

Consider the following conditions of beginning inventory and the stated results:

Beginning Cost of Inventory | Goods Sold | Net Income
A. Overstated | Overstated | Overstated
B. Understated | Understated | Understated
C. Overstated | Overstated | Understated

Which condition is true with regard to beginning inventory, assuming FIFO is used?
A. Condition A
B. Condition B
C. Condition C
Explanation: When beginning inventory is overstated, inventory costs assigned to the cost of goods sold will be overstated and consequently net income will be understated.

User Contributed Comments 7

User Comment

if BI overstated -> COGS overstated -> from I/S Netincome will be reduced(understated)
Yurik74 Got this right, got this right! Mighty me : )))
jpducros COGS and NI goes in opposite only C is possible.
davidmdye Based on the Question, how can we know if the beginning investors is overstated? It does not mention if prices are rising or are stable.
ascruggs92 davidmdye: luckily in this question you don't have to know that. Just know that COGS and NI cannot both be overstated/understated, as higher COGS leads to lower net income and vice versa. That alone allows you to answer this question
davidmdye Thank you Ascruggs92
milica818 Also I read somewhere to assume that prices are rising if we are not told prices are declining/increasing!
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