CFAI Curriculum Reading 16 EOC question 7 - Inventories

CFA Level II
#1

Q) Crux’s nventory turnover ratio computed as of 31 December 2009, after the adjustment suggested by groff ( Convertin LIFO to FIFO) is closest to:

A - 5.76

B - 5.83

C - 6.13

Now, the answer is B.

However, in the balance sheet section, there is something called “Charges included in cogs for inventory write downs”

So the answer is derived as

FIFO COGS = LIFO COGS - “Charges included in cogs for inventory write downs” - Change in LIFO Reserve.

and henceforth…

Can someone explain what these charges included in cogs for inventory write downs are and why are we subtracting them from th LIFO COGS.

In the next question,

They have asked to find the FIFO Net Income

And, this is found by adding the “Charges included in cogs for inventory write downs after tax” to the LIFO Net income.

I just cant understand where to place these charges and what role do they play.

I am completely stumped at this question and its really annoying me that i dont understand it.

Am i missing something really obvious?

Thanks

#2

1st question: as I understand it. Company went from LIFO accounting to FIFO accounting. and as a result there appeared something on the balance sheet called "Charges included in cogs for inventory write downs”.

Originally with LIFO accounting - whatever inventory came in last went into the COGS (to become finished product). When they move to FIFO accounting - the inventory that came in first would go into COGS. And with this an inventory write down is occuring. So the company is trying to use older lower priced inventory in their finished product in an attempt to increase the Gross profit (Sale Price - COGS).

They write down their inventory - one time write off. Shows up on balance sheet.

Then use the older lower priced inventory in their sold product.

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so essentially the charge off - should actually be removed from the LIFO COGS - and not included in the balance sheet.

by the same token that increase in the “sales price” due to the "Charges included in cogs for inventory write downs” would need to be tax adjusted.

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S2000Magician - please correct if I am wrong anywhere here… been a long time since I did this, so pardon me for any mistakes …

#3

Okay I think i get what you say.

Correct me if im wrong.

So

  1. Company writes down their inventory.
  2. The written down inventory is used as COGS
  3. This increases profits.

Next,

This adjustment of the COGS is reflected on the BS as “Charges included in cogs for inventory write downs after tax”

How is it included if it has been subtracted from COGS.

Are you saying that the COGS on the BS is the one before the adjustment?

Also in the next question, why is this added to Net Income?

I think my brain is going to explode. crying

#4

I have the same question too. Can anyone explain this??