Inventory Accounting

This one goes out to all of you LIFO/FIFO Inv/COGS wizards out there Mittal Industries uses LIFO inventory accounting for financial and tax accounting purposes. An analyst at AF Investments believes that Mittal’s reported inventory balance and COGS do not reflect economic reality. Which of the following is a reason that LIFO accounting misstates economic reality. LIFO: A. understates cost of sales in a period of rising prices B. allows for income manipulation through changes in purchasing practices C. is based on often false assumptions D. overstates cost of sales in periods of falling prices.

B?.. through process of elimination

Same answer…B. A and D both are false. C doesn’t make much sense to me.

Yup that’s correct. I got the same answer by following the same logic. Was kinda intrigued to find out how exactly can a change in purchase practice be used to manipulate income if LIFO used - and gave up after 10 minutes of reading some seriously boring accounting text.

I think C should be the best choice. A and D incorrect of course. B refers to change in purchase practices is not persuasive explain because company cannot manipulate its income by changing purchase practices for longterm and actually, its operation will go smoothly if purchase practices go well. Am i correct?

nope, the answer is B. False assumptions might come in play but are of secondary meaning when compared to income manipulation.


Can someone explain how income can be manipulated through inventory purchase practices?

B is the correct choice You can manipulate earnings through LIFO liquidation. You can liquidate a portion of your LIFO reserve to increase earnings in a period, and to do this you just purchase less inventory in the period.

B it is. The others could trick someone who is in a rush recall that LIFO in inflationary times raises your COGS watch out for firms that randomly switch to FIFO when prices are known to be going up. There are likely massaging the gross margin % here