Inventory
Every inventory CPA exam FAR item is the same question asked from one of two ends: what is left in ending inventory, or what went out in cost of goods sold. FIFO leaves the newest costs in inventory; LIFO leaves the oldest. Under rising prices FIFO therefore reports the higher inventory and the lower cost of goods sold, and a candidate who has memorised that sentence without noticing which end the question asked about will confidently produce the complement of the right answer.
| Blueprint group | FAR-II-C |
| Area weight | 30–40% |
| Approx. share of the exam | 3.9% |
What the Blueprint asks for here
At this group the Blueprint expects a candidate to calculate the carrying amount of inventory and the cost of goods sold under the cost flow assumptions an entity may adopt, to apply the relevant subsequent measurement rule, and to prepare the journal entries that result.
This is our paraphrase, not the Blueprint’s wording. verbatim quote pending The authoritative representative-task text is in the AICPA Blueprints, which are published free — download them and read the group directly. We will not print a quotation we have not taken from the source document.
Inventory CPA exam FAR items: LIFO, FIFO and what each one leaves behind
Why this group is worth its weight
Inventory is examined at the Application and Analysis levels and it is one of the few groups where a single fact pattern can support four different correct answers depending on one word in the stem. That makes it unusually efficient to practise: the same set of numbers, asked four ways, exercises most of what the group tests.
The three assumptions, stated as what they leave behind
FIFO assumes the earliest costs leave first, so ending inventory is priced at the most recent purchases. LIFO assumes the latest costs leave first, so ending inventory is priced at the oldest costs, which under a periodic system means beginning inventory and the earliest purchases. Weighted average under a periodic system uses one rate for the whole period: total cost of goods available divided by total units available. Whatever the assumption, cost of goods available for sale is fixed, so ending inventory and cost of goods sold are complements — find one and the other is subtraction.
Periodic and perpetual are not the same answer
Under a periodic system the assumption is applied once at the end of the period. Under a perpetual system it is applied at each sale. For FIFO the two give the same figure; for LIFO and for average cost they do not, because a perpetual moving average recomputes the rate after every purchase. The exam states which system is in use, and that statement is load-bearing rather than scene-setting.
Subsequent measurement, which is two rules not one
Inventory measured under LIFO or the retail inventory method is carried at the lower of cost or market, where market is replacement cost bounded by a ceiling of net realisable value and a floor of net realisable value less a normal profit margin. All other inventory is carried at the lower of cost and net realisable value, with no ceiling-and-floor test. Which rule applies is determined by the cost flow assumption, and candidates who learned only the second rule get the LIFO items wrong in a way that looks like an arithmetic slip.
The standard this group is examined on is published by the standard setter: FASB Accounting Standards Codification. The Blueprint coordinates and weight ranges above come from the AICPA Blueprints. What is ours, and labelled as ours, is the reading, the practice item and the misconception tags.
A practice item
our own practice item Written by us against the public Blueprint. It is not an AICPA question and it is not taken from any review course.
A company uses a periodic inventory system. Beginning inventory was 100 units at $10 each. During the year it purchased 200 units at $12 each and then 300 units at $14 each. It sold 400 units during the year.
What is the cost of ending inventory under FIFO?
| A | $2,200 | |
| B | $2,800 | correct |
| C | $2,533 | |
| D | $4,800 |
The rule
Under FIFO the earliest costs are assigned to cost of goods sold and the most recent costs remain in ending inventory. Cost of goods available for sale is fixed for the period, so ending inventory and cost of goods sold always sum to it: establishing either one determines the other by subtraction.
The arithmetic
Units available are 100 + 200 + 300 = 600 and 400 were sold, so 200 units remain. Under FIFO those 200 are the most recent purchase, at $14: 200 × $14 = $2,800. Cost of goods available for sale is $1,000 + $2,400 + $4,200 = $7,600, so FIFO cost of goods sold is $7,600 − $2,800 = $4,800. LIFO ending inventory would be 100 × $10 + 100 × $12 = $2,200, and periodic weighted average would be 200 × ($7,600 / 600) = $2,533.
What we would ask you first
This is the part of the product that is hard to show without an account, so here it is directly: for each wrong option above, the opening question our tutor asks — before any explanation — targeting the specific mistake that option represents. Choosing A ($2,200) and choosing D ($4,800) are different errors and deserve different first questions.
If you chose A — lifo_applied
“Your figure prices the 200 remaining units at the oldest costs in the period. That is a real answer to a real question — just not this one. Which costs does FIFO assume left the building?”
If you chose C — weighted_average_applied
“You used one rate for every unit in the period. That is the weighted average answer. FIFO does not blend the layers — which specific layer are the last 200 units from?”
If you chose D — cogs_reported_as_inventory
“Your figure is the complement of the right answer: it is what left, not what stayed. Both numbers come out of the same calculation, so read the question again and take the other one.”
To be precise about what happens next: the exchange is a rate limit, not a gate. Answering well gets you to the full worked explanation in three or four exchanges; answering badly still gets you there. And if you would rather skip it, asking three times gets you the walkthrough.
Common questions
What is the difference between LIFO and FIFO on ending inventory?
FIFO assumes the earliest costs left first, so ending inventory holds the most recent costs. LIFO assumes the latest costs left first, so ending inventory holds the oldest costs. When prices are rising FIFO therefore reports higher ending inventory and lower cost of goods sold than LIFO; when prices are falling the comparison reverses.
Do periodic and perpetual systems give the same answer?
Under FIFO, yes. Under LIFO and average cost, no. A perpetual system applies the cost flow assumption at each sale, so a moving average is recomputed after every purchase and perpetual LIFO can draw from layers a periodic calculation would leave untouched.
Misconception tags in this group
These are the labels our diagnosis attaches when a wrong answer matches a known pattern. They are worth reading even if you never use the product — naming your own error is most of the work.
lifo_applied— Applying LIFO where FIFO was asked for, or the reverse.weighted_average_applied— Blending all layers into one rate when a specific cost flow assumption was specified.cogs_reported_as_inventory— Answering with cost of goods sold when ending inventory was asked for.periodic_perpetual_confused— Applying a periodic calculation to a perpetual system, which changes the answer under LIFO and average cost.lcm_vs_lcnrv— Applying lower of cost and net realisable value to LIFO inventory, which is measured at the lower of cost or market with a ceiling and a floor.