FAR · Select balance sheet accounts · 6 practice questions
CPA FAR Inventory Calculation: Ownership, LCNRV, and LCM
Fix inventory ownership first, then apply the correct lower-of rule to the goods you own. Below: a two-pass calculation that separates ending inventory from the write-down.
Try one first
Hint
First resolve ownership (exclude consigned goods; include purchases shipped FOB shipping point), then apply lower of cost and net realizable value at the item level and aggregate the adjustments.
Answer A. Start with the book amount of $240,000. Exclude consigned goods not owned ($18,000) and add the FOB shipping-point purchase in transit that is owned ($12,000). Apply LCNRV at the individual-item level: batch 1 NRV = 28,000 - 4,000 = 24,000 (write-down $1,000) and batch 2 NRV = 11,000 - 1,500 = 9,500 (write-down $500), total write-downs $1,500. Net: 240,000 - 18,000 + 12,000 - 1,500 = $232,500.
Why not B: $222,000 equals $240,000 less the $18,000 consigned goods. It's wrong because it omits the owned in-transit purchase ($12,000) and ignores the LCNRV write-downs totaling $1,500.
Why not C: $238,500 reflects only the LCNRV write-downs applied to the $240,000 book amount. It's wrong because it leaves the $18,000 consigned goods in inventory (should be excluded) and fails to add the owned in-transit purchase ($12,000).
Why not D: $252,000 equals $240,000 plus the $12,000 in-transit purchase. It's wrong because it still includes the $18,000 consigned goods (which Baker does not own) and it ignores the required LCNRV write-downs of $1,500.
Worked example
Cedar Co. uses FIFO and tests LCNRV by item. Its December 31 count totals $400,000 at cost, with no valuation adjustments needed for counted goods. The count excludes a $60,000 batch purchased FOB shipping point and shipped before year-end. The batch is still in transit. Its estimated selling price is $58,000, and completion and selling costs are $8,000. Calculate ending inventory and the write-down.
| 1 | Pass 1: Include the owned batch at cost$400,000 + $60,000 = $460,000 | $460,000 |
| 2 | Calculate the batch's NRV$58,000 - $8,000 = $50,000 | $50,000 |
| 3 | Calculate the required write-down$60,000 cost - $50,000 NRV = $10,000 | $10,000 |
| 4 | Pass 2: Reduce owned inventory to LCNRV$460,000 - $10,000 = $450,000 | $450,000 |
Cedar reports ending inventory of $450,000 and a $10,000 write-down loss.
Check: Shortcut: add the omitted owned batch at its $50,000 LCNRV amount, so $400,000 + $50,000 = $450,000.
Key points
- Exclude supplier-owned consignments; include your unsold goods held by a consignee.
- Item-level testing does not let one item's excess NRV offset another item's write-down.
- A prior write-down creates a new cost basis; do not restore it when value recovers.
How the exam traps you
- Removing goods sold FOB destination just because they left the warehouse. The seller owns those goods until delivery, so include them while they remain in transit.
- Using selling price as NRV. Subtract estimated completion, disposal, and transportation costs from selling price to determine NRV.
- Stopping at the ownership-adjusted cost subtotal. Subtract the required write-down to reach reported ending inventory.
Question 2
Hint
Separate the problem into two passes: first determine ownership at 12/31, then determine the proper measurement basis for each owned item.
Answer C. Begin with the $600,000 recorded inventory but remove the $12,000 storage cost because storage for finished goods awaiting customer pickup is a period expense, not inventoriable. Add the FOB shipping point purchase at $90,000 plus $4,000 freight-in ($94,000) and include the FOB destination sale in transit at cost of $70,000 because Atlas retained title at 12/31. Exclude the $55,000 consigned-in goods, include Atlas's consigned-out goods at LCNRV of $44,000 (50,000 − 6,000), and report the separate item at its NRV of $36,000, giving a total of $832,000.
Why not A: This reflects including the FOB shipping-point purchase but omitting the $4,000 inbound freight; the purchase should be capitalized at $94,000 (90,000 + 4,000).
Why not B: This comes from including Atlas's consigned-out goods at historical cost ($48,000) instead of at LCNRV; since NRV (50,000 − 6,000 = 44,000) is lower, those goods are reported at $44,000.
Why not D: This reflects capitalizing the $12,000 storage cost; however, storage for finished goods held for customer pickup is a period expense and should be excluded from inventory.
Question 3
Hint
Handle this in two passes: first determine which goods Alder legally owns at 12/31, then apply the valuation rule to any owned items already included at cost.
Answer C. Adjust ownership first: remove $120,000 consigned-in; add $150,000 consigned-out, $90,000 purchases in transit (FOB shipping point), and $70,000 goods in transit sold FOB destination. That produces 1,840,000 - 120,000 + 150,000 + 90,000 + 70,000 = 2,030,000 at cost. Apply lower of cost and net realizable value to the damaged line: NRV = 97,000 - 5,000 = 92,000, so write down the $110,000 cost by $18,000, yielding $2,012,000.
Why not A: This answer removes the $120,000 consigned-in and adds the $150,000 consigned-out and the $90,000 FOB shipping-point purchase but omits the $70,000 goods sold FOB destination (which remain Alder's inventory) and also fails to apply the $18,000 NRV write-down.
Why not B: This reflects correct ownership adjustments (including the $70,000 in-transit FOB-destination goods) to reach cost basis of $2,030,000 but stops before applying the lower-of-cost-and-NRV write-down on the damaged $110,000 line (NRV $92,000), so it overstates inventory.
Why not D: This total results if a candidate incorrectly treats the $120,000 consigned-in goods as owned (adding rather than removing them) while otherwise including the excluded owned goods and applying the $18,000 write-down; consigned-in goods do not belong to Alder and must be excluded.
Question 4
| # | Status | Amount | Description |
|---|---|---|---|
| 1 | Included | $210,000 | Goods held on consignment from a supplier |
| 2 | Included | $300,000 | Goods sold 12/28, shipped FOB shipping point 12/29; in transit at 12/31 |
| 3 | Included | $160,000 | Goods sold 12/30, shipped FOB destination 12/31; customer received 1/3/20X6 |
| 4 | Excluded | $250,000 | Goods purchased 12/29, shipped FOB shipping point 12/30; received 1/4/20X6 |
| 5 | Excluded | $140,000 | Ridge's goods sent to dealer on consignment 12/27; unsold at 12/31 |
| 6 | Included | $120,000 | Ridge-owned inventory damaged 12/30; NRV at 12/31 = $95,000; no write-down recorded |
Hint
Separate the problem into two passes: first determine which goods Ridge actually owns at 12/31, then apply the proper valuation basis to the goods that remain.
Answer C. Begin with the preliminary listing of $4,860,000. Exclude the $210,000 consigned-in goods and the $300,000 sold FOB shipping point; add the $250,000 purchase in transit shipped FOB shipping point and the $140,000 of Ridge's consigned-out goods that remain unsold. Apply lower of cost and NRV: write the $120,000 damaged item down to $95,000 (a $25,000 reduction). The resulting ending inventory is $4,715,000.
Why not A: This choice reflects erroneously removing the FOB-destination shipment from ending inventory simply because it left Ridge's warehouse before year-end. Under FOB destination title passes when the buyer receives the goods (1/3/20X6), so the $160,000 should remain in Ridge's 12/31 inventory.
Why not B: This amount matches the ownership/cutoff adjustments but omits the lower-of-cost-and-NRV write-down. The damaged $120,000 item must be written down to its NRV of $95,000, reducing inventory by $25,000 and producing the correct $4,715,000.
Why not D: This result would occur if a candidate treated the $210,000 of supplier consigned goods as Ridge's inventory because Ridge had physical possession. Consigned-in goods remain the supplier's inventory and must be excluded.
Question 5
| Inventory Item | Amount |
|---|---|
| goods purchased FOB shipping point, shipped by the vendor on December 30 and received by Orion on January 2 | $110,000 |
| goods purchased FOB destination, shipped by the vendor on December 29 and received by Orion on January 3 | $65,000 |
| Orion's goods shipped to a consignee on December 15 and still unsold at December 31 | $55,000 |
| Orion's goods sold FOB destination, shipped on December 30 and delivered to the customer on January 4 | $48,000 |
| Orion's goods sold FOB shipping point, shipped on December 31 | $42,000 |
Hint
Treat each item by asking two separate questions: who owned the goods at year-end, and at what amount should owned goods be measured?
Answer C. Start with the physical count of $1,240,000. Exclude the $90,000 of supplier consigned goods (not owned) and write the damaged goods down by $18,000 (from $70,000 cost to $52,000 NRV). Add the $110,000 purchase shipped FOB shipping point (title passed when shipped), the $55,000 of Orion goods out on consignment (Orion still owns), and the $48,000 goods sold FOB destination (title had not passed). Do not include the $65,000 FOB destination purchase or the $42,000 FOB shipping-point sale. Net = $1,345,000.
Why not A: This comes from incorrectly including the $42,000 shipped FOB shipping point; because title passed on shipment (Dec 31), those goods are not Orion's inventory at year-end.
Why not B: This reflects making the correct ownership adjustments for transits and consignments but failing to write the damaged goods down to NRV, inventory is $18,000 too high if the LCM adjustment is omitted.
Why not D: This results from failing to exclude the $90,000 of supplier consigned-in goods that were physically present but not owned by Orion at year-end.
Question 6
Hint
Begin with the physical count, then separately analyze ownership/cutoff items and valuation items. Offsite goods are not automatically excluded, and billed goods are not automatically sold for inventory purposes.
Answer D. Start with the physical count of $4,860,000. Exclude consigned‑in goods of $220,000 (title belonged to the supplier); include the $140,000 sold FOB destination (title had not passed by year‑end); include purchases shipped FOB shipping point of $180,000 (title passed on shipment); include goods out on consignment of $110,000 (consignor retains ownership); do not include the unshipped FOB destination order of $90,000. Those ownership/cutoff adjustments give $5,070,000 before valuation; reduce the damaged inventory from cost $160,000 to NRV $130,000 (a $30,000 write‑down). Final reported inventory = $5,040,000.
Why not A: This total often results when a candidate excludes the $140,000 of goods shipped FOB destination, treating them as sold at shipment. That is incorrect because under FOB destination the seller retains title until delivery, so those goods were still Noll's inventory at December 31.
Why not B: This total is produced by excluding the $110,000 shipped to a consignee (treating offsite goods as not owned). That is incorrect because a consignor retains legal ownership of goods on consignment until the consignee sells them, so the $110,000 must be included in Noll's inventory.
Why not C: This result follows correct cutoff and ownership adjustments but omits the valuation write‑down of the damaged goods. Damaged items' NRV is $150,000 less $20,000 costs to complete = $130,000, so the $160,000 cost must be reduced by $30,000.
Common questions
How do I calculate ending inventory with ownership adjustments and LCNRV?
First remove goods you do not own and add owned goods omitted from the count. Then apply the lower-of test at the stated level and subtract any required write-down.
Who owns inventory in transit at year-end?
Under FOB shipping point, ownership passes to the buyer when goods are shipped. Under FOB destination, the seller retains ownership until delivery.
Does FIFO inventory use LCNRV or LCM?
FIFO and average cost use lower of cost and NRV, not replacement cost. LIFO and the retail inventory method use lower of cost or market.
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- Who Owns Inventory? FOB Shipping Point, Destination, Consignment
- Correct Ending Inventory: Consignment and FOB Terms
- FIFO Lower of Cost and NRV: Finished Goods and Raw Materials
- LIFO and Retail Inventory: Lower of Cost or Market
- FIFO vs LIFO: LCNRV vs LCM for Inventory Pools
- Inventory Write-Downs: Reversals and Subsequent Events
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