LIFO Liquidation

CFA Level I FRA
#1

Here are the data:

Years: 2000; 2001; 2002; 2003

Inventory Purchased: 12K; 12K; 12K; 12K (as per above years)

Inventory Purchase price: $100; $105; $110; $115 (for each year)

Inventory Sold: 12K; 12K; 12K; 13K (as per above years)

Selling Price: $200; $205; $210; $215

Question : What amount of above firm’s gross profit in 2003 is due to LIFO liquidation?

Here’s what I did:

COGS because of LIFO = $1M; $1.26M;$1.32M; $1.48M

LIFO Inv balance = $200K; $200K; $200K; $100K

COGS using FIFO in 2003 = $115 * 11K (from 2003) + $110 *2K (from 2002) = $1.485M

FIFO Ending Inventory Balance in 2003 = 1K @ $115 = $115K

LIFO Reserve in 2003 = $15K (because of $115K - $100K)

I have two questions:

a) Why is it that FIFO COGS > LIFO COGS even when prices are going up?

b) Change in gross profit because of FIFO is -$1.485 M + $1.48M = -$5K. This doesn’t sound right.

Can someone please help me? I had a hard time transcribing the problem here. So, I am sorry about the formatting. I’d appreciate any thoughts. I spent about 2 hour on this. And I am still clueless.

I really need help.

#2

Your calculations of LIFO COGS and FIFO COGS are correct.

For the period of increasing prices, total LIFO COGS will be higher than total FIFO COGS, during 2000 - 2003 in your example Total LIFO COGS is 5.060 M which is higher than Total FIFO COGS of 5045 M.

But for some specific years that purchase is lower than sales (like 2003), the relation of LIFO COGS and FIFO COGS might be different due to the act of selling previous purchased inventory.