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.
D involves an LIFO liquidation, which can greatly distort COGS as there might be abnormally low inventory cost layers
Agree, D seems like the correct choice, but can’t B be right up there as well. If prices are declining, COGS will be lower and gross profit higher. But they might not be “overstated”. Overstated has bit of a negative connotation to it.
Agreed D is correct and delhirocks, your reasoning for option B makes complete sense.
The answer is D. B cannot be the answer because LIFO COGS always reflects current prices (hence no ovestatement of income) even when pricing are falling. So LIFO will not overstate income even when prices are falling.