CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

If a company uses FIFO and is experiencing declining inventory replacement prices, it should (under GAAP) ______

A. use specific identification method to track the declining inventory unit values.
B. change to LIFO to show a lower COGS and higher net income.
C. lower the inventory values to reflect the lower replacement market prices.
Correct Answer: C

This is the application of the lower-of-cost-or-market rule. Inventory should reflect the cost to replace the product when prices are decreasing and not necessarily the historical cost.

User Contributed Comments 4

User Comment
Rotigga The key phrase above is _inventory replacement prices_; i.e. the cost to replace inventory at the market price is less than historical cost.
quanttrader lower of cost or market rule-- applicability to reality.
johntan1979 GAAP: Lower of historical cost or market
IFRS: Lower of historical cost or NRV
choas69 the way its phrased man, ur inventory is selling lower in the market so you should lower its carrying amount in the balance sheet to match the market and done.
You need to log in first to add your comment.