CFA Level I · CFA Level I Exam · Analysis of Inventories
Under US GAAP, a company reports LIFO inventory of $400 million and discloses a LIFO reserve of $90 million. The inventory balance on a FIFO basis is closest to:
FIFO inventory equals LIFO inventory plus the LIFO reserve, so $400 million plus $90 million gives $490 million. Subtracting the reserve would be the wrong direction, because LIFO inventory is understated relative to current cost when prices rise.
- A$310 million.
- B$400 million.
- C$490 million.Correct
Explanation
FIFO inventory = LIFO inventory + LIFO reserve = 400 + 90 = $490 million. Subtracting the reserve gives $310 million, which reverses the adjustment, and $400 million makes no adjustment.
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