CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Which of the following statements concerning inventory valuation is INCORRECT?
A. LIFO is superior for income statement purposes whereas FIFO is superior for balance sheet purposes.
B. In order to adjust balance sheet values for a company using LIFO, an analyst would add LIFO reserve to the reported inventory value.
C. During periods of rising input prices, LIFO would underestimate gross profit.
Explanation: LIFO reports proper income or profit when prices are rising. FIFO would overestimate it.

User Contributed Comments 7

User Comment
danlan A is correct, it means that LIFO estimation is better for income statement and FIFO estimation is better for balance sheet.
CocaColas When input prices are falling, wouldn't FIFO actually underestimate GP since current prices would likely to be lower than the earlier inventory?
anricus Yes I agree with Cocacolas! I therefore dont think any of the above are incorrect. Could some one explain?

My understanding: FIFO = greater profits in increasing price and increasing inventory environment.

There FIFO = less profits in decreasing price environment???
anricus What I actually meant to say is LIFO gives lower profit than FIFO when prices are increasinig? Therefore how can C be incorrect?
mtcfa C is incorrect due to the semantics of the question. Using LIFO in periods of rising prices doesn't overestimate or underestimate gross profit; it simply gives the proper (most recent) cost matched to the revenue.
CoffeeGirl rising price, LIFO leads to proper income, and FIFO will understate COGS, and overstate net income.
AusPhD LIFO uses fairly current prices and as a result is quite accurate. FIFO uses old prices which are not reflective of the current environment. The answer is correct. See mtcfa's comment.
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