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Basic Question 3 of 16
Zealous Ltd. and Eager Ltd. are identical companies in every respect except that Zealous uses the LIFO method for inventory costing while Eager uses FIFO costing. The companies operate in an industry in which costs have been increasing over the past several years. Compared to Zealous, which of the following could be said about Eager?
B. Eager has a higher cost of goods sold.
C. Eager has a lower ending inventory.
D. Eager has higher total assets.
A. Eager has lower earnings per share.
B. Eager has a higher cost of goods sold.
C. Eager has a lower ending inventory.
D. Eager has higher total assets.
User Contributed Comments 8
| User | Comment |
|---|---|
| stranger | Eager would have higher EPS because the lower costs have been assigned for COGS and hence higher profit earned and EPS. Eager has lower COGS since the most recent purchases are more expensive and not accounter for COGS. Eager would have higher ending inventory since the closing inventory is costed at the most recent prices. HIGHER TOTAL ASSETS SINCE THE ENDING INVENTORY IS VALUED AT RECENT PRICES. |
| Mahen | I think since Cost of inventory for Eager @ year end would be higher which will automatically bring down the profit and nalify the difference resulting in same EPS. so answer D is the only correct answer. |
| mabrickley | wouldn't lifo method be costed at the most recent purchase price, i don't see how D would be the answer since fifo method would lower inventory |
| thud | FIFO method => higher Ending inventory. That means more assets. |
| brahmareddy | Why not B ? |
| survan | @brahmareddy Zealous is calculationg COGS using recent prices and prices are increasing so Zealous has a higher cost of goods sold. Hope i cleared why ans should not be B. |
| Inaganti6 | @thud THAT'S ONLY IN A PRICES DECREASING ENVIRONMENT. |
| andrej0143 | @stranger I won't even read that because it feels like you're yelling |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and explain how inflation and deflation of inventory costs affect the financial statements and ratios of companies that use different inventory valuation methods
CFA® 2025 Level I Curriculum, Volume 2, Module 6.