For an analyst, for which of the following ratios is LIFO a better method of inventory valuation than FIFO? Gross prof margin Current ratio Inventory T/O Rec T/O Answer being A, don’t understand this q at all. i thought FIFO was always better than LIFO.
gross profit margin: yields a conservative margin so a better method to use for balance sheet ratios LIFO is not a good indicator of replacement cost as you noted
So let me guess this straight Higher COGS is better for income statment reporting? This will drag down NI… it just doesn’t make sense… or am I msising something
When you use LIFO, COGS is more realistic because you are using recent cost of goods sold. So, profit margin is more accurate than FIFO.
Ah I see, makes sense thanks.
we this depends on your definition of good financial reporting… would you rather a firm you invest in present it’s income statement using FIFO COGS which would show you a higher NI on paper and cost the company more in taxes… or would you want the firm to use LIFO COGS which would be a better indicator of what the COGS really cost, show a lower and more conservative NI, while also lowering tax liability (i.e. more real cash stays in the firm which is better for the investor)… if you were walking blindfolded and you had a brick wall 10 feet in front of you would you want your friend to tell you it was 9 feet away or 11 feet away?
that’s right, but keep in mind that usually they ask these questions in the context of which is more reprentative of economic realities.
“As an analyst” was the key there IMHO. An analyst always want to use the more conservative figure (LIFO as it lowers NI in times of inflation).
I think best to answer this according to the assigned readings from CFA. Regarding “analysis”, use LIFO for stuff related to COGS (IS) and FIFO for stuff related to investory (balance sheet). I remember reading it Schweser that for the ratios although it looks odd we still use the adjusted value. Can’t find it again tho.
umm everyone, “a firm you invest in” should insinuate someone is providing the analysis here, what is all the nit picking for?