- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 25. Inventories
- Subject 4. The LIFO Method
CFA Practice Question
Which of the following are reasons for a decline in the LIFO reserve?
II. Price decreases in the cost of inventory
III. Liquidation of inventories
I. Price increases in the cost of inventory
II. Price decreases in the cost of inventory
III. Liquidation of inventories
A. I and II
B. III only
C. II and III
Explanation: A decline in the LIFO reserve can occur for two reasons: (1) there is a liquidation of inventories; more sales are made than purchases, and (2) prices are falling during the period.
User Contributed Comments 3
| User | Comment |
|---|---|
| kalps | LIQUIDATION OF RESERVE MEANS THAT MORE SALES ARE MADE THAN PURCHASES |
| danlan | LIFO reserve decline means less difference between LIFO and FIFO for inventory, the comes because of the price decrease or the inventory liquidation |
| CoffeeGirl | LIFO reserve = INventory (FIFO) - Inventory (LIFO) I: price increase --> higher COGS for LIFO --> lower Inventory LIFO --> higher LiFO Reserve II price decrease --> lower COGS LIFO --> higher Inventory LIFO --> lower LIFO reserve III: liquidition: mores sales then purchase. so, LIFO reserve down |