Assets
The Inventory Flow
The cost flow assumption plus the direction of the error decides income.
How the exam words it
- -The stem gives layers of purchases and sales and asks 'what is the cost of ending inventory?' or 'what is COGS for the March 20 sale?'.
- -Ending inventory is overstated or understated and it asks 'the effect on net income in the CURRENT year'.
- -It gives cost and NRV for several items and asks for the lower-of-cost-or-NRV total.
- -It asks for the inventory turnover ratio or a LIFO liquidation effect.
The playbook
- 1Anchor on the formula: beginning + purchases - ending inventory = COGS, and identify which piece the question hides.
- 2Apply the flow assumption in the right order: LIFO sells the newest layers, FIFO the oldest, and perpetual applies layers as of each sale date.
- 3Write down to NRV item by item, and under US GAAP never reverse a write-down.
- 4For errors, run the direction twice: an ending inventory overstatement overstates Year 1 income, understates Year 2, and self-corrects in retained earnings after two years.
The trap
Plugging beginning inventory where the formula needs ending inventory, or reversing the direction of an error's income effect.
How the exam varies it
The same pattern, re-skinned along these axes:
FIFO versus LIFO versus average, periodic versus perpetualCompute a value versus trace an error through two yearsCost measurement versus NRV write-down versus a ratio
Drill this pattern
8 questions of The Inventory Flow from across the AUD topics. Clear it by getting 5 right with a streak of 3.