lifo

CFA Level I
#1

a company uses the lifo inventory method. the reported gross income for the year is most likely to be overstated and require adjustment if during the year they experienced: a. increase in inventory prices b. decrease in inventory prices. c. increase in inventory quantities. d. decrease in inventory quantities.

#2

Bud, if you need help with that question…best hit the books asap…

#3

care to answer and give a reason buddy?

#4

Its actually a good question: Answer is D is it?

#5

yes, d is the answer. can you explain? a decrease in inventory price would also overstate gross income.

#6

A decrease in LIFO reserve due to falling prices does not require an adjustment because LIFO still accounts for current replacement costs in COGS However, a decrease in the LIFO reserve due to LIFO liquidation requires an adjustment as it results in understated COGS and overstated profits. Where did you study this reading from?

#7

beatthecfa Wrote: ------------------------------------------------------- > A decrease in LIFO reserve due to falling prices > does not require an adjustment because LIFO still > accounts for current replacement costs in COGS > > However, a decrease in the LIFO reserve due to > LIFO liquidation requires an adjustment as it > results in understated COGS and overstated > profits. > > Where did you study this reading from? wow, i completely missed the question. I thought they were asking to compare this company to a company using fifo.

#8

You’re welcome:)

#9

I don’t think I would have gotten this right, but FSA was always my weakest area. This is not the usual type of LIFO/FIFO question; this question is harder or more subtle. In fact, I believe D would be the answer whether or not LIFO or FIFO is used. I think the issue is that if the inventory quantities are being run down over the year, then income is overstated because COGS is not fully reflected in the fact that inventories need to be replenished. You’re basically generating income by running down your balance sheet.

#10

beatthecfa Wrote: ------------------------------------------------------- > You’re welcome:) Thanks.