CFAI Practice Assessment - FRA - Luhvul

Question 1

When calculating the interest coverage ratio under FIFO, why is LIFO liquidation not part of the calculation?

My thought process was “ok, the numerator is EBIT, and there was a LIFO liquidation that made them $1,517 in pre-tax earnings, I should subtract that from EBIT since EBIT is earnings (before interest and tax).”

I’m not looking at the problem at the moment but I believe LIFO liquidation should already be reflected in the COGS and hence, EBIT. You’re just subtracting the change in LIFO Reserve from EBIT. Any LIFO liquidation should already be accounted for on the balance sheet (LIFO Reserve, Inventory, etc…) since it happened during the year.

If I am remembering the particular practice assessment correctly, I think LIFO liquidation was used to help calculate some ratio involving core earnings (i.e., that’s when you would subtract from EBIT).

this is a case where i solve the problem correct… it makes me think i know what im doing and then on the exam the problem will require you to make the adjustment and you think its included…FML