CFA Practice Question

CFA Practice Question

The peaks and valleys of the business cycle tend to be magnified using which inventory method?
A. weighted average
Explanation: Businesses tend to increase selling prices as costs rise, regardless of the fact that inventories may have been purchased before the price rise. The reverse effect occurs in periods of price decreases.

User Contributed Comments 7

User Comment
51cfa why peaks and valleys of FIFO is bigger than that of LIFO?
Ebenezer Boom-prices rising but FIFO charges outdated costs. Income magnified.
Recession-prices falling but FIFO charges higher cost. Loss magnified.
MrsP A red herring?
CFunder I guess it depends if the focus is on the income statement or balance sheet and if the peaks and valleys refer to either the income statement or balance sheet. normally it should refer to the sales volume though.
Andy552 Surely:-

During peaks, prices rising, FIFO reports higher prices (as it's current), taxes higher, income is reduced?

LIFO has outdated prices so this should magnify the cycle...
Ifi2703 Yep, followed the same line of thinking as Andy552 and got it wrong! :-(

My brain hurts...
drmonroe19 This is not a clear question. Peaks and valleys have no definition.
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