I would like help in understanding this question please
2013 Level 1 Vol 3 FRA
page 398 question 23
“Using the inventory record for purchased lemon drops shown in Exhibit 4, the cost of sales for 2009 will be closest to…”
answer is on page 401/402
I do not understand why the 3rd cost listed (23 July 2009) is 45 instead of 70
Anyone?? Thanks in advance
Chip
you will have better luck if you post the full question
But he’d better paraphrase it or it will be deleted to avoid copyright infringment.
FIGURE 4
(states in the opening paragraph that material inventories and purchased finished goods are accounted for using the FIFO method)
DATE CARTONS Per unit amt (CHF)
beginning inventory 100 22
4 Feb 09 Purchase 40 25
3 Apr 09 Sale 50 32
23 july 09 Purchase 70 30
16 Aug 09 Sale 100 32
9 sept 09 Sale 35 32
15 Nov 09 Sale 100 28
Using the inventory record for purchased lemon drops shown above, the cost of sales for 2009 will be closest to:
CHF 3550
CHF 4550
CHF 4850
thanks in advance
There is a mistake, you had 100 and bought 110, therefore you cannot sell more than 210 ?
sorry
15 Nov 09 is Purchase, not sale
With FIFO, it is easy you can just take all inventory + purchases and take the beginning for your sales. You started with - 100 @ 22 Then it became - 100 @ 22 - 40 @ 25 - 70 @ 30 - 100 @ 28 With FIFO you tap on the oldest first then your sold items are: - 50 of the first 100 - 100 becomes 50 of the first 100, 40 of the ones at 25 and 10 of the ones at 30 - 35 is still picked at 30. That gives you: - 100 x 22 + 40 x 25 + 45 x 30 = 4550 Computing the COGS with FIFO is easy because the order is irrelevant, you always pick from the oldest inventory.
BlueTrin, awesome explanation and thanks!!
Here is the CFA answer:
310 cartons available for sale ( 100 + 40+ 70 + 100)
185 cartons were sold (50 + 100 + 35) leaving 125 in ending inventory
FIFO cost:
100 (beginning inventory) x 22 = 2200
40 ( 4 Feb 09) x 25 = 1000
45 (23 July 09) - 1350
COS = 2200 + 1000 + 1350 = 4550
As I said, I understood the 100 x 22 and 40 x 25 but not the 45 so I greatly appreciate your explaining that.
I think you should draw the inventory step by step. The FIFO means that you take from the oldest inventory. I kind of explained the 45 but I will add more details, it is important you understand the mechanism of FIFO.
You start with
Then you buy 40@25, your situation is now:
COGS = 40 x 25
Inventory is:
100@20
40@25
You sell 50, then your situation is:
COGS = 50 x 20
Inventory
50@20
40@25
You purchase 70@30, your situation is:
COGS = 50 x 20
Inventory
50@20
40@25
70@30
You sell 100@ 32, the 100 are taken from the oldest inventory this is why:
COGS = 50 x 20 + 50 x20 + 40 x 25 +10 x 30
Inventory
You sell 35@ 32, the 100 are taken from the oldest inventory this is why:
COGS = 50 x 20 + 50 x20 + 40 x 25 +10 x 30 + 35 x 30
Inventory
The last step does not matter for COGS.
As you can see, the results is exactly the same for FIFO if you collapse all purchases first because order does not matter for FIFO. This is helpful if you need to save some time for the exam.
If you collapse all results, you draw the inventory after all purchases, then notice that you sell 185, you directly pick it from the inventory from the top and it is much faster.
This was extremely helpful. The one example in the CFA book was not really enough to help me understand this concept–me anyway. I thought this was one of the toughest sections thus far made moreso by knowing how crucial an area it is both for the exam and for finance in general.
Glad I could help. I attended the exam in December. If I had only 1 advice to give, it would be to start with the topics you find the hardest first . For me it was FRA, the second advice I have is to try to understand the bigger picture rather than learning by heart.
if you understand fully FRA it significantly reduce the number of things you need to know by heart and you can deduce many results from your knowledge meaning that it will stick for longer.
i tried to learn by heart and it was really rough and tough, I hope I passed though.