CFA Practice Question

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).
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