Doubt on a question of scswer q bank in FRA

CFA Level I FRA
#1

Guys

What do you feel should be the Answer of this question. Its a Scswer q bank and they say answer is A???

If prices are decreasing, the best estimates of inventory and cost of goods sold from an analyst’s point of view are provided by: A) FIFO inventory and LIFO cost of goods sold. B) LIFO inventory and FIFO cost of goods sold. C) FIFO inventory and FIFO cost of goods sold.

#2

In my opinion, the correct answer shall be C.

#3

Its A as Per scswwer Q bank

#4

Any further explanation on Schweser Q bank ? Why ?

#5

With decreasing prices - your latest inventory is cheaper, older inventory is more expensive.

So with FIFO inventory - your Balance sheet will look bigger.

With LIFO COGS - your COGS will be lower on the Income statement - so your Profits will be inflated.

#6

cpk to the rescue

#7

Answer is absolutely correct !!!

Read the question again it says “PRICES ARE DECREASING.” So LIFO COGS and FIFO inventory reflect lower (current) market prices.

but what if PRICES ARE INCREASING

then higher prices are reflected in FIFO inventory ( cheap items are sold first, expensive items are in inventory) and in LIFO COGS ( expensive items are sold first so COGS is higher and reflecting current prices.)

Now read both scenarios again, same thing is stated twice

Either prices increase or decrease FIFO inventory and LIFO COGS reflect the most recent events. (and vice versa that’s why FIFO COGS and LIFO inventory always need adjustments)