Negative LIFO reserve (CFAI Reading 35 Q5 Part A)

Hi, I am trying to understand the solution for CFAI reading 35 Q5 Part A where we need to convert Zeta’s COGS in LIFO to COGS in FIFO in order to find the net income. The solution in Appendix pag A-18 says that “LIFO Reserve increased by $4000”, this is the 1st thing that puzzle me: LIFO reserve in 2003 is (46000) and in 2004 is (50000) (1) Why it is increasing? Should it be decreasing by 4000… Next I tried to apply the equation: COGS in FIFO = COGS in LIFO - (LIFO_reserve_end - LIFO_reserve_begin ) COGS in FIFO = $3.8 M - ( (-50,000) - (-46,000)) = $3.8 M + 4000, so COGS in FIFO > COGS in LIFO. (2) Is my calculation wrong or we need to adjust the equation when LIFO reserve is negative? (3) My last question is whether there is a LIFO liquidation in this question b/c Inventory on LIFO basis decrease from 2003 to 2004. I don’t see that got mention in the solution, am I wrong with my observation. If there is a LIFO liquidation, how should we solve this problem? sorry for the long post and thanx in advance for all your help

  1. u can clearly see from the question that LFres increased from 46K to 50K 2) Just minus 3.8-(50K-46K) dont get confused by the signs. i am not sure y u r using -50K and -46K

Yes COGS(fifo) = 3.8 - (50-46) right as study note guidance. I haven’s seen any document tell putting minus signs before LIFO-reserve

Hi CFAjunkie, Thu Thuy The reason I put a minus sign is because LIFO is negative for those two years and according to the equation it is “the change in LIFO reserve” that we need to consider. That’s bring me to a case I think of For example if in 2001 the LIFO reserve is (1) and in 2002 LIFO reserve is 4. Is the “change in LIFO reserve” equal (4-1) = 3 or (4 - (1)) = 5? Thanks

Hi Anyone please clarify whether the negative value in LIFO reserve need to taken in account when calculating the change in LIFO reserve. Many thanx