CFA Level I · CFA Level I Exam · Analysis of Inventories
Under US GAAP, a company reports cost of goods sold (COGS) of $1,200 million using LIFO. The LIFO reserve was $80 million at the start of the year and $110 million at the end of the year. COGS on a FIFO basis is closest to:
FIFO COGS is LIFO COGS minus the increase in the LIFO reserve: $1,200 million less $30 million equals $1,170 million. Using the ending reserve instead of the change, or adding the change, gives incorrect figures.
- A$1,090 million.
- B$1,170 million.Correct
- C$1,230 million.
Explanation
FIFO COGS = LIFO COGS − change in LIFO reserve = 1,200 − (110 − 80) = $1,170 million. Adding the change gives $1,230 million (wrong sign), and subtracting the ending reserve alone gives $1,090 million (wrong base).
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