- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 6. Analysis of Inventories
- Subject 1. Inventory Valuation
CFA Practice Question
If a company uses FIFO and is experiencing declining inventory replacement prices, it should (under GAAP) ______
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.
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. |