CFA Mock Q 66

The morning part of the CFA Level 1 mock there is a questions that asks:

The following information is available for a manufacturing company:

$ Millions

Cost of ending inventory computed using FIFO


Net realizable value


Current replacement cost


If the company is using International Financial Reporting Standards (IFRS) instead of US GAAP, its cost of goods sold (in millions) is most likely:

A. .3 Lower

B. The Same

C. .3 higher

I don’t understand why its .3 lower, under GAAP you use replacement cost of 3.8 vs 4.1 NRV under IFRS; therfore it should be .3 higher under IFRS as compared to GAAP

The cost of the ending inventory is the same under both IFRS and US GAAP : $4.3mn

IFRS : Cost of ending inventory - Net Realizable Value = 4.3mn - 4.1mn = 0.2mn decrease

US GAAP : Cost of ending inventory - Replacement Cost = 4.3mn - 3.8mn = 0.5mn decrease

Therefore, inventory under IFRS is 0.3mn higher than under US GAAP. Higher inventory = lower COGS

IFRS means lower depreciation of inventory, which in turn means the costs charged to the COGS will be lower. Consequence is that COGS under IFRS will be lower (net income higher) compared to US GAAP.

Regards, Oscar

Remember it’s asking for COST OF GOODS SOLD not inventory.

Keeping in mind this ecuation :

COGS= Beg Inv.+Purchases - End. Inv.

(using FIFO for both IFRS and US. GAAP Beg Inv and Purchases will be the same until inventory write down ) so COGS difference will be :

COGS(IFRS)- COGS(US. G)= - End Inv. (IFRS)+ End Inv.(US. G)=-4,1+3,8= -0,3 (=> 0,3 lower )