Inventory Systems, Cost Flow, and Valuation

This chapter covers inventory accounting, a classic FAR area where method choice and valuation adjustments significantly affect income and the balance sheet. The challenge is to keep the system, cost-flow assumption, and write-down rule separate in your reasoning.

In This Chapter

• Periodic and Perpetual Inventory Systems explains inventory record systems.
• Inventory Cost Flow Assumptions and Weighted-Average Methods covers major cost-flow assumptions.
• Lower of Cost, Net Realizable Value, and Market Rules addresses valuation write-downs.
• Retail Inventory and Gross Profit Estimation Methods introduces estimation approaches.
• Inventory Errors, Cutoff Problems, and Adjustments covers the ripple effects of mistakes.

How to Use This Chapter

• Read this chapter after receivables so working-capital accounts stay grouped together.
• Separate system questions from valuation questions before you calculate anything.
• Come back here when FIFO, weighted-average, and write-down rules start blending together.

In this section

• Periodic and Perpetual Inventory Systems
  Discover the key differences between periodic and perpetual inventory systems, including journal entries, impacts on COGS, and best practices for effective inventory management.
• Inventory Cost Flow Assumptions and Weighted-Average Methods
  Master Inventory Costing Methods for accurate financial statements: explore FIFO, LIFO, Weighted-Average, and Specific Identification.
• Lower of Cost, Net Realizable Value, and Market Rules
  Master the essentials of applying lower of cost or net realizable value (LCNRV) and lower of cost or market (LCM) for inventory under both U.S. GAAP and IFRS. Learn key concepts, real-world examples, and critical differences to excel on the FAR CPA Exam.
• Retail Inventory and Gross Profit Estimation Methods
  In-depth coverage of the Retail Inventory Method and the Gross Profit Method, featuring step-by-step calculations, real-world examples, and best practices for estimating inventory balances.
• Inventory Errors, Cutoff Problems, and Adjustments
  Learn how to identify, correct, and prevent inventory misstatements using a 2-year approach and best-in-class accounting methodologies.