In 2008 CFAI Curriculum, Reading 35, Practice problem 4, page 341, question C-ii. Abbreviated BS for Companies Zenab and Faybech: 20X1 20X2 Zenab Inventory 24,900 25,200 Zenab LIFO reserve 3,600 5,100 Faybech inventory 22,300 30,300 IS for Companies Zenab and Faybech in 20X2: Zenab Faybech Sales 92,700 77,000 COGS 61,300 52,000 Zenab on LIFO (70%, rest on FIFO), and Faybech on FIFO (100%). Question: Zenab 100% LIFO Gross Margin, and Faybech LIFO COGS. I got no clue on the first one, and I miscalculated on the second, and cannot see detailed calculation from CFAI answer book. Anyone can help me? The answer from CFAI book was, Zenab 100% LIFO GM - 33.2%, Faybech LIFO COGS 53,675 Answer with calculation detail much appreciated.
In the CFAI answer, the Zenab COGS and Sales is the same as listed above, but the 100% LIFO GM was calculated as 33.2%, rather than 33.9% (which is (92700-61300)/92700). And my calculation for the conversion as follow: inflation rate=Zenab delta LIFO reserve/BI_FIFO=(5100-3600)/(24900+3600)=5.26% Faybech LIFO COGS = FIFO COGS + BI_FIFO*r=52000+22300*5.26%=53,173 I scratched my head and could not find out why my calculation was wrong. Maybe the reason falls within the 70% LIFO stuff? But how to take this into account?
I figured out the second problem: Because only 70% of Zenab’s inventory is accounted using LIFO, thus the LIFO reserve should be corresponding to only 70% of the inventory. In this case, the formula should be adjusted as: inflation rate = delta LIFO reserve / (70% * BI_FIFO) = (5100-3600)/[70%*(24900+3600)]=7.51% . LIFO COGS= FIFO COGS + BI_FIFO * r = 52000+22300*7.51% = 53,675 Anyone help me to point out the problem in the logic, thanks in advance! Still no idea on the first problem.
legoland, another forum member named cadlag did a great job of answering this question back in November. http://www.analystforum.com/phorums/read.php?11,626318,626318#msg-626318
hiredguns1, thanks a lot for pointing me to that resource. I was really frustrated at the answer in the CFAI curriculum.