If during a period of rising prices, a LIFO liquidation occurs ...

By Investopedia Staff AAA
Q:
If during a period of rising prices, a LIFO liquidation occurs, which of the following would most likely occur?
a) Cost of goods sold would increase.
b) Net income would rise.
c) Since this does not represent a change in accounting policy, no changes would take place.
d) Subsequent replenishment of inventory would be at lower values.
A:
The correct answer is: b)
Remember that LIFO transmits the latest prices of inventory over to cost. Therefore, what's left behind in inventory are the items with lower costs. A LIFO liquidation occurs when these low cost inventories are eventually transmitted to cost. Hence, COGS would decrease and net income would rise. Note that once, these low cost items are transferred out of inventories, eventually, as inventories become replenished, they will be done so with higher cost items.
2005 CFA Level 1 LOS: 9.1.A.f

RELATED FAQS

  1. 12b-1 fees in mutual funds, are known as “asset-based distribution charges,” ...

    The correct answer is b. To initiate 12b-1 fee charges in a mutual fund, there must be a majority vote by the full board ...
  2. The Shur-Gro variable annuity uses an AIR of 3% for those contract holders who are ...

    The correct answer is b. Any time the actual growth rate of the separate account exceeds the account’s AIR, the payment will ...
  3. Sometimes investment banking firms allocate shares of hot issues to the personal ...

    The correct answer is a) Spinning is the act of selling hot issues to the personal accounts of corporate officers which in ...
  4. Donald has been putting aside money for his retirement into a Roth IRA for six years.  Although ...

    The correct answer is A) In a Roth IRA, there is no required distribution date as there is in a traditional IRA.
RELATED TERMS
  1. No results found.

You May Also Like

Related Articles
  1. No results found.
Trading Center