- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 22. Inventories
- Subject 5. Measurement of Inventory Value
CFA Practice Question
Inventories valued using ______ are least likely to incur inventory write-downs.
A. FIFO
B. LIFO
C. Weighted average cost
Explanation: The inventory-carrying amounts used under the LIFO method are already conservatively presented at the oldest and lowest costs (given increasing inventory costs).
User Contributed Comments 8
| User | Comment |
|---|---|
| sjurrens | Guess we're supposed to assume rising prices because of inflation? I picked weighted average since it tries to average costs and wouldn't matter if prices are rising or falling |
| prtwf | yes if not specified, assume the prices are rising. |
| jamesrbrown7 | If you are writing down inventory doesn't that imply the value / cost to replace is going down? |
| gill15 | LEAST likely... god.. |
| schweitzdm | I assumed since FIFO is preferred when regarding balance sheet accuracy that it would require less adjustments/writedowns. I was wrong. |
| SMcalister | I guess outdated historic inventory from a year ago *is* less likely to be written down if prices have been going up. I guess it's a lesson to be learned because we're always being reminded that FIFO is the most recent inventory and most accurate. It's also a lot higher if prices have been going up. So because of this fact, it's more likely to be written down if it becomes obsolete or similar. |
| dbedford | Write Down occurs when carrying value is more than market value, so when you are using LIFO you will always be selling at market value (assuming rising prices) and the inventory amount will be lower than market values for that same amount of inventory. |
| Patdotcom | If nothing is said about evolution of prices, I undestand that the FIFO leaves inventories with more recent prices so more difficult to need written downs. |