Question about Inventory analysis

[victorlung]

Hi,

I dont quite understand the answers for the following question which is about FIFO and LIFO:


Q: How many of the following statements about the LIFO and FIFO inventory accounting methods are FALSE?

I. For purpose of inventory analysis , FIFO is preferred over LIFO.
II. FIFO COGS = LIFO COGS - change in LIFO reserve
III. In periods of declining prices, LIFO debt-to-equity ratios are higher than FIFO debt-to-equity ratios.
IV. If LIFO cost of goods sold is overstated by $200,000, ending inventory will be understated by $200,000.

A. None
B. One
C. Two
D. Three

The answer is C.

I know III is false. But is IV also false? Can anyone advice me why IV is false?

Thank you very much

 

[Somjin]

as the relationship below;

Change in Ending inventory = Change in Beginning Inventory + Change in Purchase - Change in COGS

So, if COGS is overstated, Ending inventory will be understated as equation above.

 

[victorlung]

Sorry, I am still not quite understand. If the above equation holds, then option IV should be corrected?

thx

 

[financegal]

IV is false because overstatement of LIFO can be due to either understatement of ending inventory or overstatement of beginning inventory

 

[victorlung]

Oh, I got it. Thx a lot.

 

[Dolomite]

III. In periods of declining prices, LIFO debt-to-equity ratios are higher than FIFO debt-to-equity ratios.


if prices are decreasing and you use LIFO, your inventory will be greater, and COGS are less...with COGS, less..NI is greater.... so D/E would be less wouldn't it? opposite for FIFO with decreasing prices... can someone correct my faulty logic..

 

[CFAHouston]

Dolomite, your correct. When prices decline, LIFO d/e would be less.

That's why III. is wrong. The question asks for how many are wrong..which is two. (3rd & 4th one)