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Basic Question 0 of 7
Which of the following is an advantage of LIFO inventory valuation over FIFO during periods of falling prices (assuming not all inventory is sold)?
B. Tax savings associated with lower reported earnings
C. It more closely adheres to the matching principle.
D. It more closely parallels the physical flow of goods sold.
A. Ending inventory on the balance sheet is reported at its current replacement cost.
B. Tax savings associated with lower reported earnings
C. It more closely adheres to the matching principle.
D. It more closely parallels the physical flow of goods sold.
User Contributed Comments 9
| User | Comment |
|---|---|
| stranger | a. ending inventory on the balance sheet is reported at the first in cost under LIFO. b. since prices are falling LIFO would show higher profits and hence higher taxes. c. LIFO MATCHES CURRENT PERIOD COSTS TO CURRENT REVENUE. D. physical flow of good might involve use of older stock but LIFO accounts for costs using last in. |
| vincenthuang | b is correct when the price goes up |
| danlan | In Period of falling prices, COGS is higher under LIFO and earnings are higher under LIFO, so tax is higher under LIFO, B is wrong. |
| jwubcsb | Just a minor correction danlan. In a period of falling prices COGS is LOWER under LIFO resulting in higher income which also means higher taxes. |
| mtcfa | C is correct under all conditions. LIFO is best indicator of allocating costs to revenue. |
| hizmo | "falling" prices. |
| cleopatraliao | thanks jwubcsb:D |
| quanttrader | prices are falling, and for LIFO lower cogs |
| Shaan23 | I agree with mtcfa. Key point. Regardless of rising or falling prices C is correct. |
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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.