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Basic Question 7 of 16
Which of the following statements is (are) true under U.S. GAAP?
II. In periods of rising prices, cost of goods sold under LIFO will be greater than under FIFO.
III. The use of LIFO increases inventory holding profits during periods of rising prices.
IV. A company may use LIFO inventory procedures for tax purposes and another cost method for financial reporting purposes.
I. If a LIFO inventory layer is depleted in one period, it can always be replenished by an identical layer in the next period.
II. In periods of rising prices, cost of goods sold under LIFO will be greater than under FIFO.
III. The use of LIFO increases inventory holding profits during periods of rising prices.
IV. A company may use LIFO inventory procedures for tax purposes and another cost method for financial reporting purposes.
User Contributed Comments 18
| User | Comment |
|---|---|
| Nancie | What is inventory holding profit? |
| Gausin | Inventory Holding profit should be something like this = Mkt Value of Inventory(Current prices) - Inventory Value(using LIFO/FIFO). |
| Nancie | Thanks Gausin, then LIFO could increase inventory holding profit since it has a lower inventory value compared to mkt value? |
| dlo1 | Under FIFO, the earlier purchases at lower prices are used to calculate COGS, thus realising the "inventory holding profit" from holding inventory under rising prices. Under LIFO, the most recent purchases at higher prices are used to calculate COGS, so "inventory holding profit" is not realised unless there is a LIFO liquidation. |
| omf24 | I thought what you use for inventory you have to use for tax reporting, so if you use LIFO for one you have to use it for another? |
| divide | no. You can use different rules for tax and fin reporting. |
| parry89 | omf24 is right i think... there another question that states that if LIFO inventory is used for taxes, company must use LIFO for financial reporting...which makes sense otherwise companies could exploit tax benefits without suffering from the lower NI effect of LIFO |
| sonerdem | If your local authorities only accepts US-GAAP for tax purposes and somehow if you need to report based on IFRS(for headquarters in Europe for instance) , LIFO is not even permitted.Thus you must use FIFO addition to LIFO. |
| parry89 | makes sense thanks sonerdem |
| sjurrens | If LIFO is used for tax purposes, it must be used for financial reporting. This is the LIFO Conformity Rule. |
| gill15 | just think of it as profit from inventory.. |
| Nando1 | IV would not be true under IFRS. It's based on IRS Reg 1.472-2. LIFO must be used for financial reporting purposes it if was used for tax purposes. |
| Rchan89 | IFRS doesn't allow for LIFO |
| johntan1979 | IV is not a correct answer. LIFO Conformity Rule states that if you use LIFO for tax purposes, you must use LIFO for accounting and financial reporting purposes. IFRS don't even allow LIFO so there's no point bringing this up. Answer should be II only. |
| 2014 | Johntan is rite |
| Shaan23 | I agree with Johtntan but I havent had ANOTES be wrong on a single question so far. |
| isalya | Good, Johntan |
| CJHughes | AN - "Valuation Methods" basic questions. Q: Under U.S GAAP, a company that uses the LIFO method to compute taxable income must use ____ method for financial reporting? Ans: LIFO Therefore, answer here should only be option II. |
I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz
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.