[CPApracticer]

I am not comprehending Becker’s answer to this question, can someone please explain this to me. Thank you

CPA-00075 Under US GAAP during periods of inflation, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory valuation method?

FIFO LIFO

A. No No

B. Yes No

C. Yes Yes

D. No Yes

Answer: B

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)

[NYIACCT89]

I haven't touched FAR materials since my exam on 7/1, but the first thing that jumps out in my head when I read this question is the shortcut Becker mentions regarding FIFO inventory, which is that the ending inventory amount for a FIFO system will always be the regardless of whether you calculate it under the perpetual or periodic method (so you calculate it using the periodic method to save some time!). Additionally, knowing that this general rule does not work for LIFO would lead me to choose choice B.

Knowing this fact will eliminate choices A and D as possibilities, and should also eliminate C as well.

However, When I came across a conceptual question like the one you posted in FAR on a topic that I was having trouble grasping conceptually, I found it very helpful to create my own simple scenario with numbers given the circumstances and try to find the answer that way.

For example, lets say you are calculating the year end inventory for a company given the following events (where inflation is occurring):

1/1/x1 – Opening inventory = 10 units at $5 a piece

4/1/x1 – Sold 5 units

7/1/x1 – Purchased 10 units at $10 a piece

10/1/x1 – Sold 5 units

The ending inventories using these simple numbers are the following:

Periodic FIFO = $100

Perpetual FIFO = $100

Periodic LIFO = $50

Perpetual LIFO = $75

According to these numbers, B is the correct answer. I hope this helps and good luck!

FAR - 7/1/13 - 98
AUD - 8/31/13 - 94
BEC - 11/23/13 - 89
REG - 1/13/14 - 86

Study Materials:
Becker - Online Course and Flash Cards

[NYIACCT89]

FAR - 7/1/13 - 98
AUD - 8/31/13 - 94
BEC - 11/23/13 - 89
REG - 1/13/14 - 86

Study Materials:
Becker - Online Course and Flash Cards

[CPApracticer]

@NYIACCT89 wow that was a very helpful explanation. i understand it now. and thanks for adding an example :))

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)

[jacquelynsimon]

I love inventory! No seriously it was the easiest chapter in my Roger CPA review Course. Even the dollar values LIFO was a snap. And IFRS on inventory was a piece of cake! If you need a little help I bet I can answer a few questions for you. Let me know!

[Lidis]

Effect of Changing Prices

Period of Rising Prices

End Inv COGS Gross Profit Net Income

FIFO High Low High High

LIFO Low High Low Low

Period of Falling Prices

End Inv COGS Gross Profit Net Income

FIFO Low High Low Low

LIFO High Low High High

I memorized the first row and other rows are the opposite

[thisismyname]

The math always works out where periodic FIFO = perpetual FIFO, but can anyone clarify WHY this is the case? Conceptually I don't think I am wrapping my head around this yet. Surely there is a scenario where periodic FIFO does not equal perpetual FIFO? Thank you in advance for your help!

[splash6]

FIFO because both valuation methods are “rolling” the same way, so to speak, from newest to oldest. With Periodic, you calculate inventory value at the end of the period, but with perpetual you do intermittent calculation of value after every purchase and sale of inventory, real-time.

[thisismyname]

I think I am beginning to understand now – with FIFO, both methods “eat up” the inventory the same way, from the bottom up.

But with LIFO, it's top down so you have to consider cost layers. Under perpetual LIFO if you have several layers, you nibble on the layers individually, while with periodic LIFO you will end up taking a big bite from the top. Each LIFO layer has a different cost, which is why there is a difference between LIFO perpetual and periodic valuation methods. Hard to describe with words but I think I get it. Thanks guys!

[Author]

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