CFA Practice Question
In periods of rising prices and stable or increasing inventory quantities, the impact of LIFO and FIFO on working capital is ______.
A. LIFO: lower; FIFO: lower
B. LIFO: higher; FIFO: lower
C. LIFO: lower; FIFO: higher
Explanation: LIFO results in lower working capital because the inventory balances retain earlier (lower) costs and thus lower current assets.
User Contributed Comments 7
| User | Comment |
|---|---|
| JZino | The problem I have with this question is, in inflationary INV increasing environments capital assets increase year over year. Maybe I overthought this one by picking B but I thought they were trying to trick us again. |
| HoyaPaul | even still its not clear that lifo would result in higher levels of working capital - i.e. the increase in the prices may more than offset the increasing qty making working capital lower. |
| shiva5555 | What is working Capital? |
| chandsingh | yeah its a bit tricky as if you take lower inventory to mean additional cashflows then you would not pick c but if you take working cap as ca - cl then c is ok.working cap is ca- current liabilities |
| bidisha | Working capital = current assets - current liabilities |
| ashish100 | Bidisha's comment helped. When Price is going up. Fifo -> Higher Current Assets Lifo -> Lower Current Assets Do the math...... :D |
| Horv | JZino, do not get confused of working capital (Current Assets - Current Liabilities) with Capital Assets (Property). |