 Hello and welcome to the session in which you would look at CPA exam questions that deals with inventory. This topic is covered on the FAR exam section as well as intermediate accounting. What I do as far-hat accounting lectures, I do help you pass the CPA exam. I do not compete with your CPA provider. So if you have a CPA provider, that's fine. That's great. All what I can do is fill in the gaps that your CPA providers can do because the CPA provider such as Becker, Roger, Glyme, Wiley, whatever CPA provider you are using, they do help you learn the material, but they assume a certain level of knowledge. The issue is sometimes you may never learn that knowledge in college or sometimes you learn it a long time ago. So if you go to my website, you will find additional courses and additional material and specifically courses that complement and supplement your actual CPA accounting course. So I'm going to invite you to check out my website. That's going to help you tremendously if you're studying for the CPA exam. As always, I'm going to remind you to connect with me also on LinkedIn. YouTube is my YouTube channel. I have 1,800 plus accounting, auditing, finance, tax, as well as Excel tutorial. If you like my lectures, please like them, share them, let everybody know about them. But on my website, farhatlectures.com, you will find additional resources. For example, if you're taking a CPA course, whatever CPA course you are taking and with whatever provider you are using, I can complement and supplement. So in this session, I'm going to go over certain questions that deals with inventory and show you how much you know and how much you don't know and constantly invite you and re-invite you to visit my website to learn that material in depth. My subscription is practically nominal for the value that you get, so I strongly suggest you check it out. Let's take a look at this first question in which I will show you how to approach this question. In a period of falling prices, which is not normal, but you have to be careful, that could happen. Which of the following inventory valuation method would report the highest cost of goods sold and the highest inventory valuation? So here's what you do. Do not try to memorize questions like this. You want to make sure you understand them and I'm going to show you how to find the answer real quick. You would say, here's my cost and prices are falling. So I bought something for $7, I bought something for $6, $5, $4, $3 and $2. Those are prices that are falling. Then I sold something, I sold one item and one item will do the trick. I sold one item. Let's assume I sold one item for $9. I sold one item for $9. Which method will give me the highest cost of goods sold? Well, the highest cost of goods sold, it's going to give me, to get my highest cost of goods sold, I must be selling the first item, first item. So FIFO will give me the highest cost of goods sold. So LIFO is out because prices are falling. So it's either C or D. So I know cost of goods sold FIFO. Which method give me the highest inventory? Well, here we go. Now I have to see, OK, if my prices are falling, if my prices are falling. And here's what I would do if my prices are falling. And if I, let's, let's keep going with the $7. If I use FIFO, if I use FIFO, so FIFO is gone. What I'm left with is with 6, 5, 4, 3, 2. That's 5, 9, 14, 20. So my ending inventory will be 20. If I'm using FIFO, if I'm using FIFO, if I'm using LIFO, I'm using LIFO. So FIFO, this is my inventory under FIFO. If I'm using LIFO, here's what's going to happen. If I'm using LIFO, I'm going to sell the $9. It's going to be matched with the two because LIFO lost and first out. This was lost in. So what I'm going to be left with is those. That's 7 plus 6, 13 plus 5, 18 plus 22 plus 25. So almost I must be using LIFO to give me the highest inventory. Therefore, in falling prices, cost of good sold will be FIFO and ending inventory is LIFO. So notice I would never, ever try to memorize this because here's what they could do. They can ask you because they can ask you the questions in so many different ways. They can ask you what happened if we have pricing prices. And rather than the highest, they could tell you the lowest. They could tell you the lowest for inventory and the lowest for cost or the lowest for inventory and the highest for cost. The best way to answer these questions is to take a moment. Make sure you understand how FIFO and LIFO works, but take a moment to jot down some simple numbers like what I just did now. Prices are falling. I sold something for nine. What will give me the highest cost? Well, first and first out. This is my highest cost. Now I'm down to 50-50. Now, at least if I have to guess, I'll guess between C and D. Then LIFO is going to give me the highest inventory because my latest inventory is low. I'll get rid of it and I'll keep the high inventory from the old inventory. So hopefully this makes sense. Let's take a look at this question. So notice here in a period of rising prices, which of the following would be higher under LIFO rather than FIFO? So notice you cannot, you cannot memorize those. That's why I say you got to, you got to do what? You got to work an example. Like real quick, jot down some numbers. Prices are rising. Two, three, four, five. That's good enough. And this is my cost and I sold one item. That's it. And I sold this item for six dollars. So sale and I sold it for six dollars. So which of the following would be higher under LIFO rather than FIFO? So I'm going to have two sale. So one for FIFO and one for LIFO. Let's see. And the sale will be the same, whether it's FIFO or LIFO. So if I used FIFO, FIFO is first and first out. It means I'm going to be matching the two with the six. Six minus, sorry, six minus two equal to four. My gross profit is four. So this is my cost of goods sold. This is my cost of goods sold. This is my sale and this is my gross profit. If I'm using LIFO, I'm going to be matching the six with the five. Six minus five equal to one. This is my sales, cost of goods sold and gross profit. So what's the question? Now I can answer the question really easily. Which of the following would be higher under LIFO? Then FIFO, starting with cost of goods sold. Cost of goods sold is higher under LIFO. Higher under LIFO. Notice because cost of goods sold under LIFO. Let me change my color here. Under LIFO is five. Under FIFO is two. There we go. So one will stay. So A will stay, B is out. C will stay and D will stay because one is one of them. Net income, would LIFO be higher under net income? No, it can be higher. Why? Because if my cost of goods sold is higher, my net income will be lower. So net income is out. Two is out, C is out, D is out. So by process of elimination, one is correct. Let me just make sure that three is not correct. So if I'm using LIFO, if I'm using LIFO, what's going to happen under LIFO? Last and first out, I'm going to take out the five. What's left is four, three, two, that's nine. So my ending inventory is nine. My ending inventory will be lower under LIFO. So it is correct. A one is the only correct answer. Once again, if you try to memorize those, you're going to be in big, big trouble on the exam day. Just make sure how it works. Jot down some numbers. This is how I solve it. So I don't recommend you memorize. Try to do it this way. And the more you practice, even I have to do it, like, even though you may think, you know, I do this day in and day out, I, you know, I have a CPA prep company, I still can't answer these questions without going through the, through the, through the motion of doing the calculation. And don't believe in mnemonics in these things. Because again, they could give you, rather than rising, they can give you falling rather than FIFO. They give you FIFO and you'll be so confused if you try to memorize. Oh, is this FIFO? Is this FIFO? Which mnemonic am I using? Don't, not for these questions. Please don't do that. Okay. And again, I do have that topic cover in depth and detail on my forehead lectures.com for year 13. The bridge company, bridge corp has a beginning inventory of 41,875, ending inventory of 32109. Purchase returns and freight are in, are in for 20,200 and 24,360, respectively. Purchases are 112,800 and freight out is 5,733. And the question is, how much is cost of goods sold? They could ask you many questions about this, but they're asking you how much cost of goods sold. So hopefully before you walk into the exam, you know, this formula about cost of goods sold by heart, beginning inventory plus purchases minus ending equal to cost of goods sold. Hopefully, you know this much, you know, beginning inventory plus purchases minus ending inventory. So let's see what we are giving here. Are we giving beginning inventory? Yes. So beginning inventory is 41,875. Are we giving purchases? Oh, we're giving a lot about purchases. We are giving ending inventory. We are giving purchase return and freight purchases. So here we go. So now you also have to find your purchases because purchases is, let me do a different color with purchases. So you're going to have to compute purchases separately. What's my purchases? Well, I paid 112,800. So I'm going to compute my net purchases. So this is purchases. Purchase returns and freight. So I returned 20,200. That's going to be minus 20,200. I paid transportation 24,360. I'm going to add 24,360 and freight out 5,730. Be careful. Freight out is not part of your purchases. Freight out is an expense, is an operating expense. Freight in will be added. Just like we added the freight in of 24,000, freight out is an operating expense. Now I'm ready to compute my net. This is called net purchases. Let me get the calculator, compute my net purchases. Then from my net purchases, I'm going to subtract ending inventory. So 112, let me keep the calculator here. 112,800 minus 20,200 plus my transportation 24,360 equal to 116,916. Now you want to make sure what goes into this account net purchases because you also could be giving taxes are included. Taxes, insurance, while in transit, make sure you know how to compute net purchases. So my purchases is 116,960 and my ending inventory, I believe that's giving my ending inventory is 32,109 minus 32,109. Let's perform the computation and see if this is work. So purchases plus beginning inventory 41,960 minus 32,109. And that's going to give me 126,811. And this is none of the answers, none of the answers. Maybe I did a math problem, math issue. So 41,875, that's correct, beginning inventory purchases. Let me redo this again. Purchases 112,800 minus the purchase return plus the freight. Let's do it again. So 112,800 minus 20,200 plus 24,360, that's equal to 116,960 and ending inventory of 32,109. Okay, let's do it again. Beginning inventory is 41,875 plus 116,960 minus 32,109 and that's equal to 126,726 and this is like a good number. 126,726 and the answer is A. So notice I made the math error and luckily my answer wasn't, you know, I made the math error but it was one of the answers, it was not one of the answers. So be careful but you want to make sure walking into the exam, knowing beginning inventory plus purchases, minus ending inventory equal to cost of goods sold. Sometime you have to compute purchases or net purchases. So you know what goes into purchases. Purchases plus freight in minus any discount, minus any returns. Here we did not have any discount, we had returns plus any additional costs like insurance while entrains it, that gets included to your purchases but it's not giving here, okay? So that's good. Let's take a look at this question. We don't need a calculator anymore, let's take it out. If LIFO is being used to account for ending inventory and cost of goods sold for tax purposes, which of the following accounting standard would then require LIFO to be used for financial statement purposes under what's known LIFO conformity rule? Okay, so here they're kind of giving us the, you know, this is, this will be an easy, easy questions if you get this question. If you don't know this answer, you got to just memorize it. This is something you can memorize, okay? For you is the first thing I want you to know, okay? LIFO, LIFO is a gimmick when it comes to IFRS. So IFRS don't believe in LIFO. So simply put, IFRS should not be included in any of the answers. So knowing this much, so knowing two is out, you can take this. And you can take this. You're down to 50-50 now. You're down to 50-50. So if LIFO is being used to account for ending inventory and cost of goods sold for tax purposes, which of the following accounting standard would require LIFO? Well, IFRS doesn't accept LIFO. Hopefully, you know, USGAP, you should know this much, that USGAP allows you to use LIFO. And the reason they allow you is to reduce your taxes. It's a long story why they do so, but that's beside the point. But this is the story that I tell you on my website for additional resources. So the answer is A. And this is an easy question. No, LIFO conformity rule. What is LIFO conformity rule? It means if you use LIFO for financial, so here's LIFO conformity rule. We have financial and we have tax. And here's what happened. If you're going to use it for tax, if you're going to use LIFO for tax, I'm sorry, you're going to have to use it for financial. OK, why? Now, why that's it's let me explain the rule. Why? Let's go back to to working some numbers. So it's because you want to memorize this, but also you want to understand it. Generally, generally speaking, cost rise, generally speaking, cost rise. Now, sometimes costs do go down, but generally speaking, they rise. So here we go. You have a cost and the cost is two, three, four, five. Those are the dollar amount, two dollars, three dollars, four and five. Now you sold one item for seven dollars. You sold one item for seven dollars. This is the sale for tax purposes. What do you prefer for tax purposes? You want the five dollars to be matched with the sale. So your profit, your taxable income is only two. That's what you want. You want to use LIFO lost and first out. So this is why you would use LIFO for tax. But what what the rule says, that's fine. You want to use LIFO for tax. That's fine. But you cannot use LIFO for tax. Then when it comes to your financial statements, you would say, OK, I made a sale of seven dollars. I'm going to match the sale with the two dollars. You cannot say that seven minus two equal to five and you will show for financial purposes a profit of five. You cannot have it both ways. You cannot pay taxes on two dollars. Then show a profit of five on the same transaction. That's out. You use that for tax. You have to use it for financial. This is the LIFO conformity rules. Now, if you don't use LIFO for tax, you could do whatever you want to for for that matter. It's only it's only LIFO conformity rule. Why? Because LIFO reduce your taxes. They don't want you to have the best of both words. Pay less taxes on your taxes. And when it comes to financial statements, show high profit. I'm sorry. That's not allowed. That's basically it. As always, I'm going to invite you again and again to visit my website for had lectures dot com for additional lectures and resources about intermediate accounting, advanced accounting, auditing, tax, you name it, finance. I have plenty of resources for a nominal fee. You can you can subscribe to all my resources, study hard, stay safe and good luck.