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Basic Question 7 of 10
How should gross profit be adjusted to account for the illusory income effect associated with LIFO liquidation?
B. Subtract the before-tax LIFO liquidation amount.
C. Subtract the after-tax LIFO liquidation amount.
A. Add back the before-tax LIFO liquidation amount.
B. Subtract the before-tax LIFO liquidation amount.
C. Subtract the after-tax LIFO liquidation amount.
User Contributed Comments 3
| User | Comment |
|---|---|
| kalps | LIFO liquidation implies that the gross profit is higher than it should be as it is based on old ost base, hence the liquidation amount should be subtracted from the cost base in order to give a realistic lower profit. |
| shasha | Should no LIFO liquidation happen, do we need to illustrate its effect on GP, which is "clean" from too old stock? |
| mtcfa | The answer is equivalent to saying "increase COGS by adding back the decline in the LIFO reserve." |
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Learning Outcome Statements
describe the presentation and disclosures relating to inventories and explain issues that analysts should consider when examining a company's inventory disclosures and other sources of information
CFA® 2024 Level I Curriculum, Volume 2, Module 6.