CFA Practice Question

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CFA Practice Question

Which of the following statements would be true in a LIFO liquidation (assuming the company uses the LIFO inventory valuation method and prices are rising)?

A. Unit purchases are less than unit sales.
B. Unrealized holding gains would be created.
C. Gross margin decreases.
Correct Answer: A

In this situation, some beginning inventory is assumed to be sold, and consequently a LIFO layer is liquidated.

User Contributed Comments 3

User Comment
stranger a. HERE WE SELL MORE THAN WE PURCHASE HENCE WE START ACCOUNTING OLDER COSTS TO COGS CAUSING LIFO LIQUIDATION (LIFO RESERVE REDUCES) b. this is normal situation and adds to LIFO reserves c. these alss are created in normal situation d. gross margin increases as more of older costs(lower prices) are assigne to COGS and hence increases the income
viannie more sale (that is, more COGS incurred) than purchases, therefore, LIFO liquidation occurs.
choas69 to sum it up: LIFO liquidation is one of the reasons that cauese the LIFO reserve to decline, the in rising prices the LIFO reserve should be increasing with time, however when it starts to decline this means that the firm is running out of stock and the LIFO reserve declines. Hence the name and answer; unit purchases are less than unit sold.
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