CFAi sample exam Q:NI of FIFO,LIFO

CFA Level I
#1
  1. an analyst gathered the following information from a company’s most most recent financial statemenes (in millions): Preferred stock 40 Common stock 120 Additional paid-in capital 30 Retained earning 190 Treasury stock (55) Total shareholders’ equity 325 Total # of common shares outstanding 10millions Tax rate 40% Analyst also determined that company used LIFO, but most companies in industry use FIFO method. The footnotes to financial statements indicate that if company had use FIFO method, the inventory balance would have been $45million higher than the amount reported on company’s most recent financial statements. If company’s common stock is currently selling for $59 per share, the most appropriate P/BV ratio to use in valuing the company is : a.1.59 b.1.68 c.1.79 d.1.89 answer: d.1.89 FIFO method is right method to value the company. adjusted BV =325-40(preferred stock)+27(inventory adjustment)=312 million inventoryt adjustment must be tax affected because although COGS would be reduced by 45 million ,only 60%(1-tax rate) would be added to retained earnings. P/BV=$59/(312/10)=1.89 – BV (FIFO) =BV (LIFO)+NI change*(1- tax rate.) NI change=NI(FIFO)-NI(LIFO)=sales-COGS(FIFO)-sales(LIFO) +COGS(LIFO)= LIFO reserve change=LIFO reserve ending- LIFO reserve begn LIFO reserve ending=45. Q doesn’t give LIFO reserve begn…how do we know NI change =45.
#2

inventory balance would have been $45million higher than the amount reported on company’s most recent financial statements --> means this is the change in LIFO reserve. CP

#3

cpk123 Wrote: ------------------------------------------------------- > inventory balance would have been $45million > higher than the amount reported on company’s most > recent financial statements --> means this is the > change in LIFO reserve. > > CP -------------------------------------------------------- I don’t agree with you. INV(FIFO)=INV(LIFO)+LIFO reserve higher 45 is LIFO reserve

#4

This is the first year that LIFO->FIFO conversion is happening, at least for the purposes of valuation. So the entire LIFO Reserve is the change in LIFO Reserve, too, isn’t it? CP

#5

cpk123 Wrote: ------------------------------------------------------- > This is the first year that LIFO->FIFO conversion > is happening, at least for the purposes of > valuation. So the entire LIFO Reserve is the > change in LIFO Reserve, too, isn’t it? > > CP ---------------------------------------------- don’t take it granted. even it is 1st year’s LIFO->FIFO conversion. company can still trace back to find out last year LIFO reserve

#6

LIFO Reserve is mentioned only in the footnotes of the statement. So given that, unless you have the previous year’s info, you cannot figure out that info. for the purposes of the problem that is all you are supposed to know. CP

#7

I don’t get it ! When do we add LIFO and when should we add back LIFO*(1-t). Textbook says tax adjustment should be done only if there is LIFO liquidation. Can some one please clarify this… We had similar discussion sometime back and it remains unresolved: http://www.analystforum.com/phorums/read.php?11,688133