About Me
CPA
1 Regulation (REG)
1.1 Ethics, Professional Responsibilities, and Federal Tax Procedures
1.1 1 Professional ethics and responsibilities
1.1 2 Federal tax procedures and practices
1.1 3 Circular 230
1.2 Business Law
1.2 1 Legal rights, duties, and liabilities of entities
1.2 2 Contracts and sales
1.2 3 Property and bailments
1.2 4 Agency and employment
1.2 5 Business organizations
1.2 6 Bankruptcy
1.2 7 Secured transactions
1.3 Federal Taxation of Property Transactions
1.3 1 Basis determination and adjustments
1.3 2 Gains and losses from property transactions
1.3 3 Like-kind exchanges
1.3 4 Depreciation, amortization, and depletion
1.3 5 Installment sales
1.3 6 Capital gains and losses
1.3 7 Nontaxable exchanges
1.4 Federal Taxation of Individuals
1.4 1 Gross income inclusions and exclusions
1.4 2 Adjustments to income
1.4 3 Itemized deductions and standard deduction
1.4 4 Personal and dependency exemptions
1.4 5 Tax credits
1.4 6 Taxation of individuals with multiple jobs
1.4 7 Taxation of nonresident aliens
1.4 8 Alternative minimum tax
1.5 Federal Taxation of Entities
1.5 1 Taxation of C corporations
1.5 2 Taxation of S corporations
1.5 3 Taxation of partnerships
1.5 4 Taxation of trusts and estates
1.5 5 Taxation of international transactions
2 Financial Accounting and Reporting (FAR)
2.1 Conceptual Framework, Standard-Setting, and Financial Reporting
2.1 1 Financial reporting framework
2.1 2 Financial statement elements
2.1 3 Financial statement presentation
2.1 4 Accounting standards and standard-setting
2.2 Select Financial Statement Accounts
2.2 1 Revenue recognition
2.2 2 Inventory
2.2 3 Property, plant, and equipment
2.2 4 Intangible assets
2.2 5 Liabilities
2.2 6 Equity
2.2 7 Compensation and benefits
2.3 Specific Transactions, Events, and Disclosures
2.3 1 Leases
2.3 2 Income taxes
2.3 3 Pensions and other post-retirement benefits
2.3 4 Derivatives and hedging
2.3 5 Business combinations and consolidations
2.3 6 Foreign currency transactions and translations
2.3 7 Interim financial reporting
2.4 Governmental Accounting and Not-for-Profit Accounting
2.4 1 Governmental accounting principles
2.4 2 Governmental financial statements
2.4 3 Not-for-profit accounting principles
2.4 4 Not-for-profit financial statements
3 Auditing and Attestation (AUD)
3.1 Engagement Planning and Risk Assessment
3.1 1 Engagement acceptance and continuance
3.1 2 Understanding the entity and its environment
3.1 3 Risk assessment procedures
3.1 4 Internal control
3.2 Performing Audit Procedures and Evaluating Evidence
3.2 1 Audit evidence
3.2 2 Audit procedures
3.2 3 Analytical procedures
3.2 4 Substantive tests of transactions
3.2 5 Tests of details of balances
3.3 Reporting on Financial Statements
3.3 1 Audit report content
3.3 2 Types of audit reports
3.3 3 Other information in documents containing audited financial statements
3.4 Other Attestation and Assurance Engagements
3.4 1 Types of attestation engagements
3.4 2 Standards for attestation engagements
3.4 3 Reporting on attestation engagements
4 Business Environment and Concepts (BEC)
4.1 Corporate Governance
4.1 1 Internal controls and risk assessment
4.1 2 Code of conduct and ethics
4.1 3 Corporate governance frameworks
4.2 Economic Concepts
4.2 1 Microeconomics
4.2 2 Macroeconomics
4.2 3 Financial risk management
4.3 Financial Management
4.3 1 Capital budgeting
4.3 2 Cost measurement and allocation
4.3 3 Working capital management
4.3 4 Financial statement analysis
4.4 Information Technology
4.4 1 IT controls and security
4.4 2 Data analytics
4.4 3 Enterprise resource planning (ERP) systems
4.5 Operations Management
4.5 1 Strategic planning
4.5 2 Project management
4.5 3 Quality management
4.5 4 Supply chain management
2 2 2 Inventory Explained

2 2 Inventory Explained

Key Concepts

Inventory Definition

Inventory refers to the goods and materials that a business holds for the ultimate purpose of resale, production, or consumption. It is a current asset on the balance sheet and is crucial for the operations of a business.

Inventory Valuation Methods

Inventory valuation methods determine the cost of goods sold (COGS) and the value of ending inventory. The three primary methods are FIFO, LIFO, and WAC. Each method impacts the financial statements differently.

First-In, First-Out (FIFO)

FIFO assumes that the oldest inventory items are sold first. This method results in lower COGS during periods of rising prices, leading to higher net income and higher ending inventory values.

Example: A company buys 10 units at $10 each, then 10 units at $12 each. If 15 units are sold, FIFO assumes the first 10 units at $10 and the next 5 units at $12 are sold, resulting in COGS of $160.

Last-In, First-Out (LIFO)

LIFO assumes that the most recently purchased inventory items are sold first. This method results in higher COGS during periods of rising prices, leading to lower net income and lower ending inventory values.

Example: Using the same purchases, LIFO assumes the 10 units at $12 and the next 5 units at $10 are sold, resulting in COGS of $170.

Weighted Average Cost (WAC)

WAC calculates the average cost of all inventory items and applies this average cost to the units sold and the units in ending inventory. This method smooths out the impact of price changes.

Example: With 20 units purchased at an average cost of $11 each (total cost $220), selling 15 units results in COGS of $165 (15 units x $11).

Inventory Errors

Inventory errors occur when the recorded inventory does not match the actual inventory. These errors can impact COGS, net income, and the balance sheet. Common errors include miscounting, theft, and damage.

Example: If a company records 100 units in inventory but only has 95 units, the COGS will be understated by the cost of 5 units, leading to an overstatement of net income.

Examples and Analogies

Consider inventory as a stack of books. FIFO is like taking books from the bottom of the stack, LIFO is like taking books from the top, and WAC is like averaging the cost of all books in the stack.

Another analogy is a grocery store. FIFO ensures older items like bread are sold first, LIFO might sell newer items like milk first, and WAC averages the cost of all items to determine the value of what's left.

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