Inventory & Depreciation
Inventory Methods
Applying FIFO, LIFO, and Weighted Average; distinguishing Periodic vs. Perpetual counting.
Questions present 2–4 purchase batches with different unit costs and ask for COGS or ending inventory under a specified method. Periodic vs. Perpetual questions are definitional or discrepancy-based. The Weighted Average method appears in both inventory and bookkeeping contexts.
What the exam tests
Definition-to-Term Identification
Match a description to the correct method (e.g., 'continuous inventory method where counts are kept up-to-date' = Perpetual Inventory).
Multi-Step Quantitative COGS Calculation
Calculate Cost of Goods Sold from purchase batches: FIFO starts with oldest units; LIFO starts with newest units; Weighted Average uses a blended cost per unit.
Method-Specific Logic Application
Identify which method assigns which costs to COGS vs. ending inventory: LIFO assigns newest costs to COGS, and FIFO assigns oldest costs to COGS.
Formula Variable Identification
Identify components of the Weighted Average formula: Average Cost per Unit = Cost of Goods Available for Sale ÷ Number of Units Available for Sale.
Discrepancy and Audit Analysis
If a physical count is higher than the system balance, identify the likely cause (e.g., failure to record all purchases in the perpetual system).
Logical Flow Mastery (FIFO / LIFO / Weighted Average)
Key rules
- ›FIFO (First-In, First-Out): oldest purchase costs → COGS; newest purchase costs → Ending Inventory.
- ›LIFO (Last-In, First-Out): newest purchase costs → COGS; oldest purchase costs → Ending Inventory.
- ›Weighted Average: Average Cost = Total Cost of Available Units ÷ Total Units Available; apply this rate to units sold → COGS and to units remaining → Ending Inventory.
- ›In rising-price environments: FIFO → higher net income (lower COGS); LIFO → lower net income (higher COGS).
Common traps
- !Applying FIFO cost flow to LIFO or vice versa when units have different purchase costs per batch.
Conceptual Discrimination (Periodic vs. Perpetual)
Key rules
- ›Periodic: COGS is calculated only at the end of the period via a physical count (Cost of Goods Available − Ending Inventory = COGS).
- ›Perpetual: COGS and inventory balance are updated continuously with every transaction.
- ›Physical count discrepancies are identified by comparing the perpetual system balance to the actual count.
Common traps
- !Assuming a perpetual system eliminates the need for physical counts. Discrepancies must still be verified.
Arithmetical Proficiency
Key rules
- ›Batch COGS = Units Sold from that batch × Cost per Unit for that batch.
- ›Sum costs across all batches used to fill the sale to get total COGS.
- ›Verify: Cost of Goods Available for Sale = COGS + Ending Inventory.
Common traps
- !Using the wrong unit cost for a batch. Check the purchase date to confirm which batch is being drawn from.
Interpretive Data Extraction
Key rules
- ›Extract: purchase dates, quantities per batch, and cost per unit for each batch.
- ›Determine total units sold and which batches (in FIFO or LIFO order) cover that quantity.
- ›Ignore narrative details about the product or business that do not contribute a number.
Common traps
- !Using total units purchased instead of units sold when calculating COGS.
Try one
Which inventory method is described as a continuous system where inventory records are updated up-to-date after every purchase and sale?
The perpetual method continuously updates the inventory balance and COGS with every transaction, so records stay current. A periodic system updates only at period-end via a physical count.
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