- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 25. Inventories
- Subject 6. Financial Analysis of Inventories
CFA Practice Question
There are 520 practice questions for this study session.
CFA Practice Question
Which of the following statements is true concerning the use of LIFO in a period of rising prices?
A. The use of LIFO will lead to a useful working capital number and inventory turnover.
B. The debt-to-equity ratio will be higher than under FIFO.
C. The use of LIFO will lead to lower cash flows.
Explanation: When FIFO is used, the cost of goods sold is lower, income is higher, and retained earnings are higher. This makes equity higher; thus, the debt-to-equity ratio under FIFO will be lower than under LIFO.
User Contributed Comments 14
|kalps||Just consider Equity as the numerator moves in the opposite direction and can refute the answer|
|ahug||I thought LIFO led to lower taxes which lead to lower cash flows? Why isn't the last one true?|
|haarlemmer||I think it lowers the cash outflows and in that sense, increases the total cashflows|
|mtcfa||The logic behind the answer is that your debt doesn't change, but your equity is less due to lower inventory levels (assets). Thus d/e is greater.|
|gord||Taxes are based on MACRS...not financial reporting methods|
|xcye||I thought LIFO lowers cash flow because it lowers NI, that has nothing to do with MACRS (which is regarding to depreciation methods). If financial reporting uses LIFO, tax return needs to use LIFO too. So why is the last choice not the answer??|
|umair||LIFO leads to lower taxes, higher cash flows
|soukhov||Lifo leads either to lower taxes, as to lower pre-tax income.|
|arendb||In d/e ratio, your equity is your denominator. So therefore, a lower equity (in case of LIFO, lower retained earnings), will have to give you a higher d/e ratio?|
|Vedo||It does not lead to lower cash flows becase inventory is lower which offsets the lower income (decarease in working capita). I think.|
|dream007||TIP: read the question and options carefully. Read option B as "D/E will be higher under FIFO..missed out THAN, which changed completely the meaning of the sentence.|
|nmech1984||wtf....is B wrong then and inconsistent with the explanation?? Ain't C the right answer?|
|nmech1984||sorry, my mistake. I have to take a break..|
|mali97||it said than . I read it 'in' .. in option B. fuck analystnotes doing wordplay|