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Worked-example setupScope and assumptions
- Cedar Trail Outfitters is fictional; the 240 owned units, qualifying unit costs, event dates, pools, and cost-flow methods are supplied for calculation practice only.
- The ordinary item is a non-LIFO, non-retail-method US-GAAP population; the separate market-test item is a LIFO population.
- NRV, replacement cost, normal profit, historical gross margin, and retail pool inputs are stipulated and require independent evidence before use in a close.
- All sales are valid removals from the stated pool; returns, discounts, shrinkage, taxes, and intercompany effects are outside this bounded schedule.
- Period
- One annual inventory period with two dated purchases and two dated sales
- Units
- Inventory units, US dollars, and decimal rates
- Rounding
- Expected values retain machine precision for deterministic verification; learner-facing amounts display dollars to cents and whole units
Start with one controlled unit stream
Cedar Trail begins with 100 owned units at $10. It buys 60 at $12, sells 120, buys 80 at $14, and sells 50. The population contains 240 available units at $2,840 total cost; 170 leave and 70 remain.
Those facts are stipulated here. In the case, the learner must first prove that the units are owned, in the correct period, and carry qualifying costs.
Compare the cost-flow schedules
| Method | Cost of goods sold | Ending inventory | Why timing matters |
|---|---|---|---|
| Periodic FIFO | $1,860.00 | $980.00 | Earliest full-period costs leave first |
| Perpetual FIFO | 1,860.00 | 980.00 | Same ending layers for this ordered stream |
| Periodic weighted average | 2,011.67 | 828.33 | One $11.833333 full-period rate |
| Perpetual moving average | 1,935.83 | 904.17 | Rate recomputed after each purchase |
| Periodic LIFO | 2,140.00 | 700.00 | Latest full-period costs leave first |
| Perpetual LIFO | 2,020.00 | 820.00 | Each sale reaches only then-available layers |
Every row satisfies cost of goods sold plus ending inventory equals $2,840. That reconciliation verifies assignment under the supplied method; it does not select a method or validate the source population.
The perpetual LIFO result can be traced without trusting the total:
| Event | Cost assigned at event | Layers after event |
|---|---|---|
| Opening | — | 100 units at $10 |
| Purchase 1 | — | 100 at $10; 60 at $12 |
| Sale 1 of 120 | 60 × $12 + 60 × $10 = $1,320 | 40 at $10 |
| Purchase 2 | — | 40 at $10; 80 at $14 |
| Sale 2 of 50 | 50 × $14 = $700 | 40 at $10; 30 at $14 |
Thus perpetual LIFO cost of goods sold is $2,020 and ending inventory is $400 + $420 = $820. The intermediate trace confirms the totals.
The periodic FIFO-versus-LIFO ending difference is $280. If those are the company's disclosed comparison bases at the same date and scope, $280 is the bounded LIFO reserve. It is not cash and not a damage allowance.
Route measurement before subtracting
The ordinary non-LIFO, non-retail item has $980 cost and $900 supported NRV. Its LCNRV carrying amount is $900, a write-down of $80.
The separate LIFO item uses the retained market path. NRV of $940 is the ceiling; NRV less $100 normal profit gives an $840 floor. Replacement cost of $880 lies inside the range, so designated market is $880. Compared with $1,000 cost, the write-down is $120.
Estimate only within the stated purpose
For the fire-loss illustration, $20,000 beginning inventory plus $80,000 net purchases gives $100,000 goods available at cost. A supplied 30 percent gross margin on $120,000 net sales yields $36,000 estimated gross profit, $84,000 estimated cost of goods sold, and $16,000 estimated ending inventory.
For the bounded average-cost retail illustration, $90,000 at cost divided by $150,000 at retail gives 60 percent. Net sales of $110,000 leave $40,000 at retail and an estimated $24,000 at cost. Neither estimate replaces a required count or proves its historical relationship remains representative.
Follow the error rather than calling it self-correcting
A $5,000 ending-inventory overstatement understates current cost of goods sold and overstates current pretax income, assets, and retained earnings by $5,000. If carried into next year and the next ending inventory is correct, next-year pretax income is understated $5,000. The two-year pretax sum is zero; each year's statements can still be materially wrong.
Verification boundary
A green workbook can show that units and costs reconcile, the selected method was executed consistently, and stipulated estimates reproduce. It cannot prove ownership, cutoff, cost eligibility, method authorization, selling-price or replacement-cost evidence, normal profit, margin stability, or disclosure.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · inventory cost flow analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- error scenarios
- 1 field
Inspect data
{
"year_end_overstatement": {
"ending_inventory_error": 5000
}
}- events
- 4 items
Inspect data
[
{
"kind": "purchase",
"unit_cost": 12,
"units": 60
},
{
"kind": "sale",
"unit_cost": null,
"units": 120
},
{
"kind": "purchase",
"unit_cost": 14,
"units": 80
},
{
"kind": "sale",
"unit_cost": null,
"units": 50
}
]- gross profit estimates
- 1 field
Inspect data
{
"fire_loss": {
"beginning_inventory": 20000,
"historical_gross_margin_rate": 0.3,
"net_purchases": 80000,
"net_sales": 120000
}
}- measurement items
- 2 fields
Inspect data
{
"lifo_item": {
"basis": "market",
"completion_costs": 0,
"cost": 1000,
"disposal_costs": 0,
"estimated_selling_price": null,
"net_realizable_value": 940,
"normal_profit_margin": 100,
"replacement_cost": 880,
"transportation_costs": 0
},
"ordinary_item": {
"basis": "nrv",
"completion_costs": 0,
"cost": 980,
"disposal_costs": 0,
"estimated_selling_price": null,
"net_realizable_value": 900,
"normal_profit_margin": 0,
"replacement_cost": null,
"transportation_costs": 0
}
}- opening layers
- 1 field
Inspect data
{
"opening": {
"unit_cost": 10,
"units": 100
}
}- retail estimates
- 1 field
Inspect data
{
"store_count": {
"goods_available_at_cost": 90000,
"goods_available_at_retail": 150000,
"net_sales": 110000
}
}Recomputed result
| Measure | Value |
|---|---|
| ending units | 70 |
| fire loss estimated ending inventory | 16,000 |
| goods available cost | 2,840 |
| goods available units | 240 |
| lifo item designated market | 880 |
| lifo item write down | 120 |
| ordinary item write down | 80 |
| periodic fifo cost of goods sold | 1,860 |
| periodic fifo ending inventory | 980 |
| periodic lifo cost of goods sold | 2,140 |
| periodic lifo ending inventory | 700 |
| periodic lifo to fifo ending inventory difference | 280 |
| periodic weighted average cost of goods sold | 2,011.6667 |
| periodic weighted average ending inventory | 828.3333 |
| periodic weighted average unit cost | 11.8333 |
| perpetual fifo cost of goods sold | 1,860 |
| perpetual fifo ending inventory | 980 |
| perpetual lifo cost of goods sold | 2,020 |
| perpetual lifo ending inventory | 820 |
| perpetual moving average cost of goods sold | 1,935.8333 |
| perpetual moving average ending inventory | 904.1667 |
| store count estimated ending inventory at cost | 24,000 |
| units sold | 170 |
| year end overstatement current cost of goods sold error | -5,000 |
| year end overstatement current pretax income error | 5,000 |
| year end overstatement next period pretax income error if uncorrected | -5,000 |