CFA Practice Question

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CFA Practice Question

Which of the following statements is (are) true under U.S. GAAP?

I. If a LIFO inventory layer is depleted in one period, it can always be replenished by an identical layer in the next period.
II. In periods of rising prices, cost of goods sold under LIFO will be greater than under FIFO.
III. The use of LIFO increases inventory holding profits during periods of rising prices.
IV. A company may use LIFO inventory procedures for tax purposes and another cost method for financial reporting purposes.
Correct Answer: II and IV

When LIFO is used in a period of rising prices, the latest and higher costs will go into cost of goods sold. When FIFO is used in a period of rising prices, the older and lower costs will go into cost of goods sold.

User Contributed Comments 18

User Comment
Nancie What is inventory holding profit?
Gausin Inventory Holding profit should be something like this = Mkt Value of Inventory(Current prices) - Inventory Value(using LIFO/FIFO).
Nancie Thanks Gausin, then LIFO could increase inventory holding profit since it has a lower inventory value compared to mkt value?
dlo1 Under FIFO, the earlier purchases at lower prices are used to calculate COGS, thus realising the "inventory holding profit" from holding inventory under rising prices. Under LIFO, the most recent purchases at higher prices are used to calculate COGS, so "inventory holding profit" is not realised unless there is a LIFO liquidation.
omf24 I thought what you use for inventory you have to use for tax reporting, so if you use LIFO for one you have to use it for another?
divide no. You can use different rules for tax and fin reporting.
parry89 omf24 is right i think... there another question that states that if LIFO inventory is used for taxes, company must use LIFO for financial reporting...which makes sense otherwise companies could exploit tax benefits without suffering from the lower NI effect of LIFO
sonerdem If your local authorities only accepts US-GAAP for tax purposes and somehow if you need to report based on IFRS(for headquarters in Europe for instance) , LIFO is not even permitted.Thus you must use FIFO addition to LIFO.
parry89 makes sense thanks sonerdem
sjurrens If LIFO is used for tax purposes, it must be used for financial reporting. This is the LIFO Conformity Rule.
gill15 just think of it as profit from inventory..
Nando1 IV would not be true under IFRS. It's based on IRS Reg 1.472-2. LIFO must be used for financial reporting purposes it if was used for tax purposes.
Rchan89 IFRS doesn't allow for LIFO
johntan1979 IV is not a correct answer. LIFO Conformity Rule states that if you use LIFO for tax purposes, you must use LIFO for accounting and financial reporting purposes.

IFRS don't even allow LIFO so there's no point bringing this up.

Answer should be II only.
2014 Johntan is rite
Shaan23 I agree with Johtntan but I havent had ANOTES be wrong on a single question so far.
isalya Good, Johntan
CJHughes AN - "Valuation Methods" basic questions.
Q: Under U.S GAAP, a company that uses the LIFO method to compute taxable income must use ____ method for financial reporting?

Therefore, answer here should only be option II.
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