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

Under US GAAP, a company that uses the last-in, first-out (LIFO) cost flow method discloses a LIFO reserve. The LIFO reserve is best described as the:

The LIFO reserve is the amount by which inventory measured on a FIFO basis exceeds inventory reported under LIFO. It lets analysts restate LIFO balance sheets to approximate current cost, and it has nothing to do with net realisable value write-downs.

  1. Aexcess of inventory at FIFO cost over inventory at LIFO cost.Correct
  2. Bexcess of current-year cost of goods sold at LIFO over cost of goods sold at FIFO.
  3. Camount by which the net realisable value of inventory exceeds its LIFO carrying amount.

Explanation

The LIFO reserve is the difference between inventory valued at FIFO (approximating current cost) and inventory carried at LIFO cost. It is not a cost of goods sold difference for one year, and it is unrelated to net realisable value, which is used for lower-of-cost-or-NRV testing.

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