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CFA Level I · CFA Level I Exam · Analysis of Inventories

In a period of rising prices and stable inventory quantities, compared with FIFO, a US GAAP company using LIFO would most likely report:

With rising prices, LIFO charges the latest, higher costs to cost of goods sold, so COGS is higher and profit is lower than under FIFO. Ending inventory retains older, lower costs and is therefore lower on the balance sheet than under FIFO.

  1. Alower cost of goods sold and higher net income
  2. Bhigher cost of goods sold and lower ending inventory valueCorrect
  3. Chigher ending inventory and higher gross profit

Explanation

Under LIFO the most recent, higher costs go to COGS, so COGS is higher and gross profit and net income are lower. The older, lower costs stay in ending inventory, so its carrying value is lower than under FIFO.

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