Doing a question and this must be wrong. I hope
LIFO reserve 2012 = 90000
LIFO reserve 2013 = 86000
NI using LIFO for 2013 = 12000
Tax = .31
I got NI(FIFO) = NI(LIFO) + (86000 - 90000) - (86000 - 90000) * (.31) = 9240
Solution is NI(FIFO) = NI(LIFO) - (86000 - 90000) * (.69) = 14760
Even logically it doesnt make sense — My answer of 9240 must be correct or I should resit for CFA I
Can you specify the page in the CFAI curriculum for this?
I have the same idea with you. Since the COGS FIFO= COGS LIFO - changes in LIFO reserve. It is logical to calculate the NI FIFO = NI LIFO +changes in LIFO reserve * (1 - tax rate).
The solution is correct. The key here is that there is a LIFO liquidation, so when you subtract the change you end up adding it back on (which makes sense since you are selling older and cheaper inventory at today’s higher prices and therefore profit should be higher)
It’s a Schweser question. If it was cfa, they have an erratum that you can always check.
Glad you agree. I hope somebody else confirms it cause otherwise my head my blow off.
Reply to ro424:
The higher profit with LIFO liquidation refers to increased profit with regards to LIFO Profit. This has to do with FIFO profit.
It’s asking for FIFO NI.
I see. I thought schweser posts errata on the website once you login.
its in there qbank not from there texts. Dont think the qbank has an errata.
9240 is what I get too.
If you think about it logically:
FIFOcogs = LIFOcogs - Change in LIFO Reserve
The change in LIFO reserve is -4000 which means FIFOcogs are 4000 higher than LIFOcogs (due to the double negative). Taking into account the tax impact means that Net Profit will be 4000*(0.69) lower due to the higher COGs which gives you the answer of 9240.
It looks like they may have labelled the 2012 and 2013 reserve numbers the wrong way around.
Thanks Swiftly…needed one other person to confirm. Question was still in my head and messing with my fundamentals.