What is the fundamental equation for calculating ending inventory?
Beginning Inventory + Purchases − Cost of Goods Sold (COGS) = Ending Inventory
Remember: You start with what you had, add what you bought, then subtract what you sold (at cost) to find what’s left.
Loft Co. uses LIFO and reviews two inventory items with these totals:
Original cost: $610,000
Replacement cost: $520,000
Net realizable value (NRV): $650,000
NRV less profit margin (floor): $613,000
What amount should Loft report for inventory using the lower of cost or market method on the total inventory?
M3 - Inventory - MCQ-05441
- Identify market value = middle value of:
Replacement cost = $520,000
NRV (ceiling) = $650,000
NRV less profit margin (floor) = $613,000
- Middle value = $613,000 (floor)
- Compare market ($613,000) to cost ($610,000)
- Inventory reported at** lower of cost or market = $610,000**
Key takeaway:
When applying lower of cost or market on total inventory, find the middle value of replacement cost, NRV, and NRV less profit margin. Then compare that market value to total cost and report the lower amount. Here, cost ($610,000) is lower than market ($613,000), so inventory is reported at cost.
What is the formula to calculate Cost of Goods Sold (COGS)?
COGS=
BeginningInventory
+Purchases
−Ending Inventory
Beginning Inventory: value of inventory at the start of the period
Purchases: inventory bought during the period
Ending Inventory: value of inventory left at the end of the period
Front:
What are the criteria for classifying an asset as “held for sale” under accounting standards?
M5 - PP&E: Depreciation, Disposal, and Impairment
Back:
An asset can be classified as held for sale if all the following are met:
- Management has committed to a plan to sell the asset.
- The asset is available for immediate sale in its current condition.
- An active program to locate a buyer has been initiated.
- The sale is probable and expected to complete within one year.
- The asset is being actively marketed at a reasonable price.
- No significant changes to the plan are expected.
