- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 25. Inventories
- Subject 4. The LIFO Method
CFA Practice Question
There are 520 practice questions for this study session.
CFA Practice Question
Liz-Beth Company reported ending inventory on December 31, 2015 of $4,000,000 under LIFO. It also reported a LIFO reserve of $700,000 on January 1, 2015, and $1,000,000 on December 31, 2015. The cost of goods sold for 2015 was $12,000,000. If Liz-Beth had used FIFO during 2015, its cost of goods sold for 2015 would have been ______.
Correct Answer: C
The change in cost of goods sold would be $300,000 ($1,000,000 - $700,000). It would increase by $700,000 and decrease by $1,000,000. Therefore, the cost of goods sold under FIFO would be $11,700,000 ($12,000,000 - $300,000).
User Contributed Comments 18
|stranger||If FIFO was used then COGS would have been reported more by 700,000 more during the year using COGS = B.Inv + Purchases - E.Inv. Hence increasing the COGS. And during the year a LIFO Reserve of 1,000,000 is created which would decrease the COGS.|
|Gina||No - using FIFO, COGS would be $300,000 less than with LIFO.|
|rainatt||COGS(FIFO)=COGS(LIFO)-(YEAR-E LIFO SESERVE - YEAR-B LIFO RESERVE),
|antarctica||LIFO reserve has increased meaning that FIFO inventory has been much higher than LIFO inventory than before -> COGS under FIFO must be lower than COGS under LIFO by that amount|
|patsy||LIFO Reserve = COGS LIFO - COGS FIFO|
|bahodir||patsy, it's not true.
LIFO Rserve = FIFO inventory - LIFO inventory
|madhi||Without doing any calculations ..
The COGS under FIFO is lower than the COGS under LIFO (Assuming rising prices)
The answer should be less than $12,000,000.
|cleopatraliao||madhi thats unreasonable...u cant just assume rising prices...|
|cleopatraliao||hang on i guess u could cuz the book says that if the inventory unit costs r rising over time& new LIFO unit layers r added to inventory then the LIFO reseve will increase....my bad lol|
|cleopatraliao||Can I think about it this way? Since LIFO reserve measures the DIFFERENCE btw FIFO inventory&LIFO Inventory. We know that the difference btw the two inventories has gone up by 300,000 (from 700,000 to 1,000,000). Therefore increase in inventory in another words means decrease in COGS???|
|gulfa99||i used the same logic as madhi..you have 1.5 mins per question in exam, and you cannot spare minutes solving each and every question..rising prices = lower cogs under FIFA|
|papajeff||That question is a gimme,with rising prices, FIFO will result in lower COGS. When only one answer is lower than the LIFO figure, no calculator is needed. 30 second question, burn the minute on a tougher one.|
|johntan1979||rainatt got it right. Save your time and ignore all comments. The correct formula:
FIFO COGS = LIFO COGS - (End LIFO Reserve - Beg LIFO Reserve)
|Ifi2703||The easy way to think about this is that LIFO overstates COGS and FIFO understates it. Therefore if COGS if $12mm under LIFO, FIFO COGS has to be less than this - this immediately tells you that your answer shld be anything that's less than $12mm.|
|Ifi2703||Apologies - when i said LIFO 'overstates' COGS, i meant it gives a more up-to-date (and usually higher) COGS figure. FIFO always gives a lower COGS figure. This is why we should expect it to be lower than the $12mm. So that gives you an intuitive way to eliminate some wrong answers before using johntan1979's calculations to get to the correct answer.|
|geofin||"To place inventory values for a company using LIFO reporting on a FIFO basis, the analyst would ADD the ending balance of the LIFO reserve to the ending value of inventory under LIFO accounting;
To adjust cost of goods sold to a FIFO basis, the analyst would subtract the change in the LIFO reserve from the reported cost of goods sold under LIFO accounting."
Page(645) of the Third Volume.
|Shaan23||No More comments -- Read Johntans Comment - Memorize formula
|Yrazzaq88||This question does not require any thinking.
FIFO has a lower COGS than LIFO
LIFO COGS = 12,000,000
Therefore FIFO must be lower.