CFA Level I · CFA Level I Exam · Analysis of Inventories
A company uses LIFO under US GAAP and experiences rising prices. It sells part of an older inventory layer, so cost of sales includes costs from earlier, lower-cost layers. This situation is best described as:
This is best described as a LIFO liquidation. Sales exceed purchases, so older, lower-cost layers are charged to cost of sales, which inflates profit in a rising-price environment and is not sustainable.
- ALIFO liquidationCorrect
- Ban inventory write-down
- Ca change in cost formula
Explanation
When units sold exceed units purchased, older low-cost LIFO layers flow into cost of sales. This is a LIFO liquidation, which raises gross profit and is not repeatable. It is not a write-down or a change of method.
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