- 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
There are 520 practice questions for this study session.
CFA Practice Question
Which of the following actions would be most likely taken by a manager whose compensation is largely tied to earnings for the period?
A. Reduce the amortization period for the write-off of goodwill.
B. Liquidate LIFO inventory layers.
C. Delay or postpone the employer contribution to the company pension plan until after year-end.
Explanation: This action results in a gain, and the current period net income increases (assuming prices are increasing). This would increase the manager's compensation for this period and have little or no impact on compensation in future periods.
User Contributed Comments 10
|kalps||Liquidation of LIFO inventory layers will result in an income gain (this is a disadvantage normally, however due to compensation benefit would be an advantage for him perosnally but not for company as cash flow impact due to higher taxes)|
|maurizio||A LIFO liquidation will increase Net Income only if Prices had been rising, which is not stated in the question?|
|MUTE||If it is not specified then you should assume the price is rising.|
|thekid||What does it mean by LIFO liquidation?
Can someone please explain...
Thanks a million.
|mazen1967||thekid: liquidate lifo means using lifo to the point that absorb the advantage of low cogs [assuming increasing of prices]|
|shiva5555||I thought both B and C were right. I understand B but why won't C work?|
|jpducros||If the price were not rising, I don't think you would have had a Lifo reserve.|
|somk||Kalps, i try to make sense of what you're saying. i cant. S0, in order not to pay the 40% tax we shouldnt generate the 60% income?
and i didnt get the answer, how this is bad? then what's good? keeping the inventory until it becomes obsolete? write it down? who in his right mind would find a buyer for an old inventory and would say "sorry, wont do, for the good of the company". i think life is wise by making most of millionaires of average education, while MBA's and CFA's work for them.
|Shortseller||somk obviously not going to pass the essay portion of level 3.|
|DariSH||actually, the themes of #1 and #3 aren't covered in SS5. So... #2 is the only option.|