Question

When calculating gross profit percentages, adjustments are made for the total LIFO effects (i.e., both liquidations and declining prices). Which of the following statements is true?

A. The adjustments for both effects provide percentages that are directly comparable to FIFO firms.

B. The adjustments will always result in higher gross profit percentages.

C. The effects of declining prices on current purchases are non-operating in nature.

D. The results, adjusted for LIFO liquidation effects, do not better reflect the firm’s ability to mark up the current cost of inputs.

Answer 1

The true statment is, (D)

The results, adjusted for LIFO liquidation effects, do not better reflect the firm’s ability to mark up the current cost of inputs.

Explanation: The the input prices for goods that are being sold are no longer assigned recent prices. These costs can be many years out of date ,causing COGS to appear very low and profits artificially high.