Inventory

Ownership

Free on board (FOB) shipping point → buyer's in transit · FOB destination → seller's · Consignment → consignor's.

Capitalize

Purchase price + freight-in + duties + normal production overhead. Expense freight-out, selling, abnormal waste, unallocated fixed overhead.

Rising prices

First-in, first-out (FIFO): highest income and inventory. Last-in, first-out (LIFO): highest cost of goods sold (COGS), lowest taxes. LIFO conformity rule; LIFO banned under International Financial Reporting Standards (IFRS).

Dollar-value LIFO

Deflate by current index → find new layer at base prices → multiply layer by its year's index.

Lower-of rules

• FIFO or average → lower of cost and net realizable value (NRV).
• LIFO or retail → lower of cost or market (LCM): market = replacement cost between floor (NRV − normal profit) and ceiling (NRV).
• No reversals of write-downs under US Generally Accepted Accounting Principles (GAAP).

Estimation

• Gross profit method: COGS = Sales × (1 − gross profit %). Markup on cost → gross profit % = markup ÷ (1 + markup).
• Retail, conventional: markups in, markdowns out of the ratio.

Errors

Ending inventory overstated → this year's income up, next year's down; retained earnings correct after 2 years.

Exam traps

• Net method: purchase discounts not taken are a finance expense, not part of inventory cost.
• Average-cost retail method: markdowns are included in the cost-to-retail ratio; only the conventional (LCM) method leaves them out.
• A loss on a non-cancelable purchase commitment is recognized when the market price falls below the contract price.
• Goods out on consignment stay in the consignor's inventory, and freight to the consignee is added to their cost.