FIFO/LIFO Question

An analyst has determined that Megamore Industries uses the LIFO inventory method. Megamore’s reported gross income for the year is most likely to be overstated and require adjustment by the analyst if, during the year, Megamore experienced a(n): A. increase in inventory prices B. decrease in inventory prices C. increase in inventory quantities D. decrease in inventory quantities Thoughts? I’ll post the answer after a few responses…just want to see if people thought like I did. I haven’t studied FSA in a while, I need to do that before I start the practice exams.

LIFO EI 20 COGS 30 Rising Price scenario Would give Gross Profit Lower than EI 30 COGS 20 Falling Price scenario So Answer B

Quantities should not be relevant as the question did not relate that to price, and gross income cannot be overstated if prices were going higher, so B is correct. Dreary

Okay because I picked B too, but apparently the answer is D. And no lightbulb went off telling me that I made a stupid mistake, so…thoughts? This is from the CFA Sample, so I don’t think they made a silly mistake…

Ok… now it makes sense. Analyst has to make an adjustment only if it is a LIFO Liquidation. In the case of a falling price scenario, which all of us picked - this is but natural, and no adjustment would not need to be made… The light bulb went off just now. Thanks for this question.

ahh light bulb for me too… this is a really good question… no wonder rumour is AFers are more likely to pass!!

oh wow! i get it now too! thanks cpk123!