CFA Practice Question

CFA Practice Question

Beginning inventory of 50 units, purchased at $5
50 units purchased at $10
35 units purchased at $9
25 units sold at $15
70 units sold at $12
Tax rate = 40%

Given the above, the LIFO reserve at the end of the period is ______.
A. $225
B. $165
C. $135
Explanation: COGS = Beginning inventory - Ending inventory + Purchases.
FIFO COGS = 50*5 + 45*10 = $700. LIFO COGS = 35*9 + 50*10 + 10*5 = $865.
Beginning inventory = 50*5 = $250. Purchases = 50*10 + 35*9 = $815.
Therefore, FIFO ending inventory = 250 + 815 - 700 = 365 and LIFO ending inventory = 250 + 815 - 865 = 200.
The LIFO Reserve is defined as the difference between the values of the inventory under FIFO and under LIFO. Therefore, LIFO reserve = 365 - 200 = 165.

User Contributed Comments 6

User Comment
Kuki Or otherwise, calculate COGS under LIFO and FIFO.

LIFO Reserve = LIFO COGS - FIFO COGS
pjdeschenes Kuki: That isn't correct. LIFO COGS - FIFO COGS = CHANGE in LIFO Reserve, not the whole LIFO Reserve.
AkashKB So is it a coincidence then ?
takor Most likely, there was no LIFO reserve at beginning of the period.
schelsea Use LIFO Reserve = FIFO Inventory - LIFO Inventory.
It is faster than using FIFO COGS = LIFO COGS - Change in LIFO Reserve.
bleublau THX, Schelsea, Using "LIFO Reserve = FIFO Inventory - LIFO Inventory. is way faster!
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