- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 25. Inventories
- Subject 4. The LIFO Method
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 |