United Corporation and Intrepid Company are similar firms operating in the same industry. United follows U.S. Generally Accepted Accounting Principles and Intrepid follows International Financial Reporting Standards. At the end of last year, Intrepid had a higher inventory turnover ratio than United. Are the following plausible explanations for the difference? Explanation #1 – United accounts for its inventory using the first-in, first-out method and Intrepid uses the last-in, first-out method. Explanation #2 – United recognized an upward valuation of inventory that had been previously written down. Intrepid does not revalue its inventory upward. Explanation #1 Explanation #2 A)No No B)No Yes C)Yes No D)Yes Yes
A
A
lol is it too straight-forward…?
LIFO is not permitted under IFRS and Inventory write down is not permitted under GAAP
I’d say even if LIFO were permitted under IFRS, the statement is still wrong. Why?
A Lifo is permitted under IFRS but most firms use FIFO (however that doesn’t matter to this question cuz the question says the company is using FIFO - just go with the question, even though you think it is wrong) Pluse inventory write down is permitted under GAAP. infact inventory write down MUST happen, if current carrying cost of inventory > market cost of inventory However inventory write up is not permissible in GAAP or IFRS.
Actually, if intrepid as a high inventory turnover: COGS/aver tot. inventory the use of LIFO method would an explanation for it
You’ve lost me here Dreary…
heha168 Wrote: ------------------------------------------------------- > lol is it too straight-forward…? Yes this question is very straight-forward. Inv. turnover = COGS/ Avg Inventory LIFO results in lower inventory, ie. hence higher Inv turnover yes so I’d say C is the answer for this question. Explaination 2 is illegal to do.
pepp see my previous answer…it is A.
Can you give explanations for why it is A? I will challenge your assumption that inventory write down is not permitted in US.
yea I focused on LIFO and didn’t see it’s IFRS the answer is A LIFO is not permitted under IFRS
pepp Wrote: ------------------------------------------------------- > Can you give explanations for why it is A? > > I will challenge your assumption that inventory > write down is not permitted in US. LIFO is not permitted under IFRS and Inventory write down is not permitted under GAAP. I dont know why inventory write down are not permitted under US GAAP it is just regulation. Call the IASB 
I doubt CFA is gonna use such questions. If something is not permitted, don’t think they’ll expect you to second guess the question. I mean this is super tricky, if they are going to use such deception I might as well stop preparing cuz no amount of preparation is going to be enough for these sort of questions. Where in the assumption implied by the question itself is to be challenged. I am quite upset at this question.
strangedays Wrote: ------------------------------------------------------- > pepp Wrote: > -------------------------------------------------- > ----- > > Can you give explanations for why it is A? > > > > I will challenge your assumption that inventory > > write down is not permitted in US. > > > LIFO is not permitted under IFRS and Inventory > write down is not permitted under GAAP. > I dont know why inventory write down are not > permitted under US GAAP it is just regulation. > Call the IASB Strange, If the prices are declining, don’t you need to adjust inventory for impairment? I mean otherwise you are overstating your inventory and working capital ratios.
Under LIFO you already have old inventory (at old price) in your stock.
What if the current market price is lower than the oldest inventory price.
that was a tricky question …