FAR · Select balance sheet accounts · 9 practice questions
FIFO vs LIFO: LCNRV vs LCM for Inventory Pools
FIFO and average cost use lower of cost and NRV; LIFO and retail use lower of cost or market. Below: compare the tests, see the same inventory under each, and practice mixed-pool valuation.
Try one first
Hint
Decide whether the inventory cost-flow method is an exception to the LCNRV rule, LIFO (and retail) follow a different 'lower of' test than FIFO/average cost.
Answer A. Under ASC 330, inventories measured using FIFO (or average cost) are tested using the lower of cost and net realizable value (LCNRV). Inventories measured using LIFO (and the retail method) use the lower of cost or market (LCM). Therefore Alpha (FIFO) uses LCNRV and Beta (LIFO) uses LCM.
Why not B: This overgeneralizes LCNRV to all cost-flow methods. It's tempting because LCNRV is the default test, but it's wrong, LIFO (and retail) are exceptions that use LCM instead.
Why not C: This incorrectly applies LCM to FIFO inventories. Candidates who focus on 'market' declines may choose this, but FIFO/average-cost inventories use LCNRV, not LCM.
Why not D: This reverses the correct pairing. It confuses which cost-flow methods are the exception, FIFO uses LCNRV, while LIFO uses LCM, so this choice is incorrect.
Side by side
| FIFO and average cost | LIFO and retail | |
|---|---|---|
| Lower-of test | Lower of cost and NRV (LCNRV). | Lower of cost or market (LCM). |
| Amount compared with cost | NRV. | Market: replacement cost bounded by ceiling = NRV and floor = NRV minus normal profit. |
| NRV calculation | Selling price minus costs to complete and sell. | Selling price minus costs to complete and sell. |
| Normal profit margin | Not used in the test. | Sets the floor; does not reduce NRV. |
| Replacement cost below the floor | Ignore replacement cost and the floor. | Use the floor as market, then compare with cost. |
| Replacement cost above the ceiling | Ignore replacement cost; compare cost with NRV. | Use the ceiling as market, then compare with cost. |
| Comparison amount exceeds cost | Keep cost if NRV exceeds cost. | Keep cost if bounded market exceeds cost. |
| Example: comparison amount per unit | NRV = $34 - $4 = $30. | Ceiling $30; floor $25; market $25. |
| Example: carrying amount per unit | $30. Cost equals NRV. | $25. Market is below cost. |
Key points
- Remember: FIFO and average cost go straight to NRV; LIFO and retail first limit replacement cost.
- Example per unit: cost $30; replacement $25; selling price $34; completion and selling costs $4; normal profit $5.
- Use each item's or pool's own method, even if most inventory uses FIFO.
- Follow the stated testing level; add carrying amounts only after separately tested items, pools, or categories are valued.
How the exam traps you
- Using replacement cost for FIFO or average-cost inventory. Compare cost with NRV. Ignore replacement cost and normal profit for these methods.
- Using the lowest of replacement cost, ceiling, and floor as LIFO market. Keep replacement cost between the floor and ceiling, then compare that market amount with cost.
- Combining costs before testing separately stated items or pools. Apply each method's test at the stated level first. Add the resulting carrying amounts.
Question 2
| Measure | Finished Goods (FIFO) | Raw Materials (FIFO) | Merch. A (LIFO) | Merch. B (LIFO) |
|---|---|---|---|---|
| Cost | $200 | $90 | $300 | $150 |
| Replacement cost | , | , | $250 | $120 |
| Estimated selling price | $260 | $105 | $320 | $190 |
| Costs to complete and dispose | $30 | $10 | $40 | $20 |
| Normal profit margin | , | , | $50 | $40 |
Hint
First identify which classes use FIFO (apply LCNRV) and which use LIFO (apply lower of cost or market). For LIFO compute ceiling = NRV and floor = NRV − normal profit margin, then bound replacement cost before comparing to cost.
Answer B. Apply LCNRV for FIFO items and lower of cost or market (LCM) for LIFO items, where market is replacement cost bounded by ceiling = NRV and floor = NRV − normal profit. Finished Goods: NRV = 260 − 30 = 230, so lower of cost and NRV = min(200,230) = 200. Raw Materials: NRV = 105 − 10 = 95, so min(90,95) = 90. Merchandise A (LIFO): ceiling = 320 − 40 = 280, floor = 280 − 50 = 230, replacement 250 is between floor and ceiling so market = 250, min(300,250) = 250. Merchandise B (LIFO): ceiling = 190 − 20 = 170, floor = 170 − 40 = 130, replacement 120 < floor so market = floor 130, min(150,130) = 130. Total = 200 + 90 + 250 + 130 = $670.
Why not A: Tempting because a candidate might take 'market' for Merchandise B as the raw replacement cost of $120 and use that instead of applying the LIFO bounds. That is incorrect: for LIFO market is replacement cost bounded by the ceiling and floor, and here replacement cost is below the floor, so market must be set to the floor (130).
Why not C: Tempting because a candidate might incorrectly apply LCNRV to all inventory classes, using NRV for LIFO items (which would put Merchandise A at NRV 280 and leave Merchandise B at cost 150). This is wrong under U.S. GAAP: LIFO inventories use lower of cost or market (with market bounded by ceiling and floor), not LCNRV.
Why not D: Tempting because it represents keeping all inventory at historical cost (no write-downs). It's incorrect because both LIFO classes require write-downs: Merchandise A's market (250) is below cost 300, and Merchandise B's bounded market (floor 130) is below cost 150.
Question 3
Hint
First compute NRV (selling price less costs to sell) per unit, then remember which cost-flow method uses LCNRV (FIFO/average) and which uses lower of cost or market with ceiling/floor (LIFO/retail).
Answer D. Under U.S. GAAP, inventories using FIFO (and average) are measured at the lower of cost and net realizable value (NRV). NRV per unit = selling price ($34) − costs to complete and sell ($4) = $30, which equals historical cost, so FIFO = 1,000 × $30 = $30,000. LIFO is measured by lower of cost or market; market is replacement cost ($25) bounded by ceiling = NRV ($30) and floor = NRV − normal profit ($25). Market therefore equals $25 (below cost), so LIFO = 1,000 × $25 = $25,000.
Why not A: Tempting from reversing the rules for each cost-flow method. It's incorrect because FIFO is measured at lower of cost and NRV (which equals cost here), while LIFO uses lower of cost or market (market = $25), so FIFO should be $30 and LIFO $25, not the reverse.
Why not B: Tempting because it applies replacement cost (market) to both methods; however, FIFO uses lower of cost and NRV (not replacement cost). Here NRV ($30) is not below cost, so FIFO stays at $30 per unit.
Why not C: Tempting if a student applies NRV to both methods; but LIFO uses lower of cost or market (replacement cost bounded by ceiling/floor). The market here is $25, which is below cost, so LIFO is written down to $25 per unit.
Question 4
Hint
First decide which cost flow uses LCNRV (FIFO) and which uses LCM (LIFO). For LIFO, determine 'market' by bounding replacement cost between the ceiling (NRV) and the floor (NRV minus normal profit), then compare cost and market.
Answer A. FIFO is measured at the lower of cost and NRV, so Alpha = lower of 300 and 260 = 260. LIFO uses lower of cost and market (replacement cost bounded by ceiling = NRV and floor = NRV − normal profit); replacement cost 190 exceeds the ceiling (170), so market = 170. Beta = lower of cost (200) and market (170) = 170. Total = 260 + 170 = 430.
Why not B: Tempting because it treats market as the unbounded replacement cost (190) and uses that for LIFO (260 + 190 = 450). Incorrect because market must be bounded by the ceiling (NRV = 170) and the floor; here replacement cost exceeds the ceiling, so market = 170, not 190.
Why not C: Tempting because it reports both inventories at historical cost only (300 + 200 = 500). Incorrect because ASC 330 requires a write-down when NRV (or bounded market for LIFO) is below cost.
Why not D: Tempting because it uses the floor (NRV − normal profit = 145) as Beta's market, yielding 260 + 145 = 405. Incorrect because the floor applies only if replacement cost falls below the floor; here replacement cost (190) is above the ceiling, so market = ceiling (170).
Question 5
Hint
Treat the FIFO and LIFO pools separately, and be careful: the valuation basis is not the same for both.
Answer A. Treat the pools separately. FIFO is measured at the lower of cost and NRV: NRV = $435,000 - $25,000 = $410,000, which is below cost of $420,000, so report $410,000. LIFO is subject to lower of cost or market: ceiling (NRV) = $590,000 - $15,000 = $575,000, floor = $575,000 - $20,000 = $555,000, and replacement cost = $560,000 falls within that range, so market = $560,000; lower of cost ($610,000) or market ($560,000) is $560,000. Total = $410,000 + $560,000 = $970,000.
Why not B: This reflects correctly reducing the FIFO pool to NRV ($410,000) but incorrectly taking the LIFO market equal to the floor ($555,000) as if the floor were automatically the market rather than using replacement cost when it lies between ceiling and floor.
Why not C: This occurs if a candidate handles the LIFO pool correctly (market = $560,000) but fails to write down the FIFO pool to NRV, leaving FIFO at cost ($420,000) instead of $410,000.
Why not D: This distractor comes from applying the lower of cost and NRV test to the LIFO pool (giving NRV = $575,000) instead of using lower of cost or market with market constrained by ceiling and floor; combined with FIFO at $410,000 that totals $985,000.
Question 6
Hint
Separate the valuation basis by inventory method before doing any amount comparison. One category uses NRV directly; the other still uses market with ceiling and floor constraints.
Answer D. For inventory measured by FIFO, current U.S. GAAP uses lower of cost and NRV, so Category F is reported at $110, not replacement cost. For inventory measured using the retail inventory method, lower of cost or market still applies. Category R's market is replacement cost constrained by a ceiling of NRV ($110) and a floor of NRV less normal profit ($98), so replacement cost of $94 is pushed up to the floor of $98; the inventory is then reported at the lower of cost ($120) or market ($98).
Why not A: This is tempting if the candidate overgeneralizes the lower-of-cost-and-NRV rule to the retail inventory method. The retail method remains under lower of cost or market, not lower of cost and NRV. Because Category R's replacement cost falls below the floor, market becomes $98, so $110 is too high for that category.
Why not B: This is tempting if the candidate remembers the floor concept and applies the older lower-of-cost-or-market framework to all inventory. That is wrong because FIFO inventory is not written down using replacement cost constrained by ceiling and floor; it is written down only to NRV under current GAAP. So Category F should be $110, not $98.
Why not C: This distractor is attractive to someone who treats replacement cost as the direct write-down target for all inventory. Replacement cost is not the measurement basis for FIFO inventory under current GAAP, so Category F should not be carried at $94. The retail-method amount of $98 is correct only because replacement cost is bounded by the floor.
Question 7
Hint
First determine which measurement test applies to FIFO versus LIFO; then compare cost to the appropriate benchmark (NRV for FIFO; replacement cost bounded by ceiling/floor for LIFO).
Answer D. FIFO (and weighted-average) inventories are measured at the lower of cost and net realizable value, so FIFO inventory is written down from cost $100 to NRV $90 (loss of $10 per unit). LIFO uses lower of cost or market, where market is replacement cost constrained by the ceiling (NRV = $90) and the floor (NRV − normal profit = $80). Replacement cost $85 falls between the ceiling and the floor, so market = $85 and LIFO inventory is written down to $85 (loss of $15 per unit). The LIFO company therefore recognizes the larger loss and lower Year 2 income.
Why not A: Tempting because students sometimes confuse when to use the market floor; incorrect because market equals replacement cost when replacement cost lies between ceiling and floor. Replacement cost $85 is between $90 and $80, so market = $85 (not the floor $80), yielding a $15 LIFO loss, not $20.
Why not B: Tempting because some students apply the replacement-cost/market approach to all methods; incorrect because FIFO is measured at the lower of cost and NRV. Here FIFO's NRV is $90, so FIFO should be written to $90, not $85.
Why not C: This appeals to students who apply the lower-of-cost-and-NRV rule universally; incorrect because LIFO uses lower of cost or market. Market here equals replacement cost subject to ceiling/floor, which yields $85 and a larger LIFO write-down than $10.
Question 8
| Item | Details |
|---|---|
| Finished goods (FIFO) | cost = $550,000; net realizable value (NRV) = $480,000. |
| Spare parts (LIFO) | cost = $200,000; replacement cost = $160,000; NRV = $170,000; normal profit margin = $25,000. |
| Merchandise (weighted-average) | cost = $320,000; NRV = $350,000. |
Hint
Remember: under U.S. GAAP apply lower of cost and NRV for FIFO/average-cost items, but for LIFO apply lower of cost and market (market = replacement cost limited by ceiling = NRV and floor = NRV − normal profit margin). Compute each item separately as stated.
Answer A. Apply lower-of-cost tests item by item. Finished goods (FIFO) are lower of cost and NRV: write-down = $550,000 − $480,000 = $70,000. LIFO spare parts use lower of cost and market; market = replacement cost limited by ceiling (NRV $170,000) and floor (NRV − normal profit margin = $145,000); replacement cost $160,000 is between floor and ceiling so market = $160,000 and LIFO write-down = $200,000 − $160,000 = $40,000. Merchandise (weighted-average) has cost below NRV so no write-down. Total loss = $70,000 + $40,000 = $110,000; ending inventory = $1,070,000 − $110,000 = $960,000.
Why not B: Tempting because it applies NRV ($170,000) directly to the LIFO spare parts (yielding only a $30,000 write-down) instead of using the LIFO lower-of-cost-and-market rule; under LIFO you must use market = replacement cost bounded by ceiling and floor, which here gives market = $160,000 and a $40,000 write-down.
Why not C: Attractive to candidates who recognize the FIFO decline but overlook the LIFO measurement difference; this choice records only the $70,000 FIFO write-down and ignores the additional $40,000 LIFO write-down required when market (replacement cost) is below cost.
Why not D: Plausible if a candidate correctly applies the LIFO market test (the $40,000 LIFO write-down) but forgets that FIFO finished goods are evaluated at the lower of cost and NRV and thus require the additional $70,000 write-down, increasing total loss.
Question 9
Hint
For one category, determine whether the special LIFO measurement rule applies. For that category, do not use replacement cost until you test the ceiling and floor.
Answer B. The FIFO category is measured at the lower of cost and NRV, so it is reported at $760 (lower of $800 cost and $760 NRV). LIFO inventory follows the lower of cost or market approach: market is replacement cost constrained by a ceiling (NRV = $540) and a floor (NRV less normal profit = $510). Replacement cost $560 exceeds the ceiling, so market is capped at $540; comparing market $540 with cost $620, report the lower amount $540.
Why not A: Tempting because 'market' is often described as replacement cost, but for LIFO market must be limited by the ceiling and floor. Replacement cost $560 exceeds the ceiling (NRV $540), so market cannot be $560.
Why not C: Attractive to candidates who recall the floor, but the floor applies only when replacement cost falls below it. Here replacement cost ($560) is above the floor ($510), so the floor does not control.
Why not D: This reflects forgetting the general LCNRV rule for non-LIFO inventory. FIFO inventory is measured at the lower of cost and NRV, so the FIFO category must be written down from $800 to $760.
Common questions
Does FIFO use LCNRV or LCM under U.S. GAAP?
FIFO and average cost use lower of cost and net realizable value (LCNRV). NRV is estimated selling price minus reasonably predictable completion, disposal, and transportation costs.
How do you calculate market for LIFO and retail inventory?
For LIFO and retail, market is replacement cost limited to the range from NRV minus normal profit to NRV. Compare that amount with cost and report the lower amount.
How do you value mixed FIFO and LIFO inventory pools?
Test each separately stated pool using its own method, then add the carrying amounts. If the question specifies item-level or category-level testing instead, use that level.
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- LIFO and Retail Inventory: Lower of Cost or Market
- Inventory Write-Downs: Reversals and Subsequent Events
- CPA FAR Inventory Calculation: Ownership, LCNRV, and LCM
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