Mock 2 question

in FSA-Mock 2, The questions says, For sweet home, if Nyberg adjusts sweets homes inventory valuation its adjusted Total asset turnover and ROE will be ? I got the asset turnover part right but not the ROE. I thought ROE will also decrease as after adding LIFO reserves to equity , equity increases and ROE decreases. Not income remains the same on the Income statement as COGS will be same ( Sweet home is using LIFO- which is the correct method to use for COGS). But the CFAI says, net income will increase by LIFO reserve ( 1-T)? I do not get this…Please help

This got me too. I hit schweser hard after that. It seems that you need to adjust COGS to LIFO, which means that NI increases by the amount of the LIFO reserve x (1-tx rate). Still uncertain. Anyone comfortable with this?

Income effect is bigger than B/S effect in this case, so ROE increases.

There should be no Income effect as COGS is in LIFO?

Anyone? Since it is already reporting LIFO inventory - surely the income statement is LIFO COGS as well? why is that adjustment therefore required?

Got this one wrong too. Also isnt the adjustment from LIFO to FIFO COGS the change in the LIFO Reserve rather than the current LIFO reserve?

the decreased cogs increases CFO but decreases NI b/c of higher taxes

I tried to get this going at some other thread but nobody picked up on it… This was my post: Re: Mock 2 question I don’t get Posted by: maaagian (IP Logged) [hide posts from this user] Date: June 3, 2008 02:06PM Also, for question 23… I dont quite remember this one but essentially it asks to evaluate the effect on asset turnover and return on equity ratios if you as an analyst add back the LIFO reserve. If somebody has a better memory, please help me out here… Anyhow, I thought that you should add back the LIFO reserve to both assets AND equity? If so, the ROE ration would decrease? They are saying it would increase because you’re increasing both the numerator and denominator by the same amount and the NI is less than Equity. That makes sense, only if you’re not adding back the LIFO reserve to Equity. Also, if you’re not adding back Equity then A = L + E doesnt hold so I dont know what they are doing here. Maybe I just didnt get the question? ---------------------------- Does anyone remember what the actual question was? Did they ask us simply what would happen to these ratios if they had used FIFO instead or did they ask us what would be the appropriate adjustments from an analyst perspective? If its the first, then yes, Assets would increase, Income would increase, and Retained Earnings would increase accordingly. If its the latter, then, I believe we are right in saying that the REO ration would decrease. I think I just assumed it to be the second alternative because I ahve been totally brainwashed from doing all the Schweser questions on this…

I got snagged on that one as well and can’t find anywhere that confirms their answer.

Now, my problem is with these mock/sample exams is that: What if we get a similar question to these questions that have been discussed here on the forum (for which some have been proved to be errors), should we answer the question based on CFA Inst. answer sheet or based on our knowledge? I mean, should we assume that these are in fact errors or is it just our understanding that is off?

The spend a lot of time and $ on scrubbing the real exam to prevent possible mistakes, like we all believe we found in this question. This is why it stinks, that CFAI doesn’t give a better solution set or allow candidates to go back and check the mocks they paid $100 for. I suggest we all write or call and complain after the exam is done.

I post this question last week couple of times but… The company is reporting in LIFO which is a correct method for COGS. Why should we add back LIFO reserve (1-tax), no idea. I went to the university library and checked schwser and stalla (old version 2007) but nothing said about this NI adjustment in any of these books. I use CFA book for FSA which does not say anything about this adjustment either. Also, how should we treat advance from customers. CFA FSA book says it is deffered income (Volume 2, FSA, Page 258) but the mock answer says it’s a debt. Why it is a debt even though no future cash outflows. Confused.