CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Capitalization of inventory costs that should otherwise be expensed will ______

I. overstate profitability.
II. overstate ending inventory value.
III. understate profitability.
IV. understate ending inventory value.
Correct Answer: I and II

Capitalizing inventory-related costs defers their recognition as an expense in the income statement until the inventory is sold.

User Contributed Comments 7

User Comment
mbowa This is clearly explained
Diruuk You think?
ascruggs92 II is correct but I is not. Incorrectly capitalizing expenses may overstate profitability for the current period, but the expense is realized either through COGS when sold or through a write off, so overall profitability is unchanged. In fact, capitalizing costs incorrectly will lead to a lower gross margin, which makes the company appear less profitable
dada If I capitalize my inventory my profitability will be overstated. True, isn't it? @ascruggs92: I got your point but I think by default we should consider the current period only.
syazwan21 Also COGS only includes those that are sold in the current period. When capitalizing inventory costs, all costs associated with inventory including those that were not sold are included. Thats why the profitability is overstated.
choas69 simple explaination is if u capitalize your expenses that shouldve been expensed :
1- less operating expense in I/S leads to higher profit.
2- carrying amount of goods available for sale in inventory will be higher and oversatted.

correct me if iam wrong.
ibrahim18 @choas69. This is such a very lovely explanation. Thanks
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