CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

The manager of Liz-Beth Co. is given a 2% bonus based on income before taxes. The net income after taxes is $11,200 if Liz-Beth uses the FIFO method for inventories. The tax rate is 30%. Cost of goods sold would have been $10,000 higher if LIFO was used. How much is the difference in the manager's bonus if LIFO is used instead of FIFO?
A. $200 higher
B. $200 lower
C. $140 lower
Explanation: If the cost of goods sold is higher if LIFO is used, then the income before taxes would be lower under LIFO, which means that the bonus will be $200 (.02 x $10,000) lower under LIFO.

User Contributed Comments 6

User Comment
george2006 bonus is based on income before tax.
Indira Bonus under FIFO = (11,200/0.7)*0.02=320
Bonus under LIFO = (11,200/0.7-10,000)*0.02 = 120
the difference is $200
rgat Help...
Net Inc diff = (1-tx)(cogs diff)see pg 311

If NetInc_Lifo = 16K &-> 16k*.02 = 320 Bonus_Lifo
Then NetInc_Fifo = 9k &-> 9K*.02 = 180 Bonus_Fifo
Bonus Diff = 140 NOT 200??

Why not apply (1-tx) to COGS Difference?
rgat correction Fifo bonus=320 & Lifo bonus=180 per my previous comment
viannie hmm, it's 2% before tax .. so got to read the question carefully! I got it AT!
somk Why the comments were much smarter in L1? are we loosing brain cells going through the process? Questions in AN are way much better than others. Dunno how i would manage in L3 without AN
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