CFA Practice Question

There are 90 practice questions for this study session.

CFA Practice Question

Which of the following is an example of a conservative accounting policy?
A. Using the FIFO inventory method when prices are rising
B. Accruing reserves for potential contingency losses
C. Using lower estimates for estimating bad-debt expenses
Explanation: Accruing reserves for potential losses is a conservative policy.

User Contributed Comments 4

User Comment
yu0825 Why A is incorrect, can someone pls explain?
copus I think that using FIFO in an environment of rising prices (as opposed to LIFO) is going to understate Cost of Goods Sold and therefore refelct higher net income, and therefore would not constitute a conservative accounting policy.
ColonelCFA Also, inventory methods such as LIFO and FIFO are situational on price levels in determining which is more conservative.
dan1987 copus is correct. During rising prices FIFO results in:
Lower COGS -> Higher Gross Profit
Higher Inventory Valuation -> Higher Working Capital

Therefore is not conservative
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