CPA Exam Select Financial Statement Accounts: Receivables, Inventory, PP&E
Last updated: May 2, 2026
Select Financial Statement Accounts: Receivables, Inventory, PP&E questions are one of the highest-leverage areas to study for the CPA Exam. This guide breaks down the rule, the elements you need to recognize, the named traps that catch most students, and a memory aid that scales to test day. Read it once, then practice the same sub-topic adaptively in the app.
The rule
Under FASB ASC 330-10-35, inventory measured using FIFO or weighted-average must be reported at the lower of cost or net realizable value (LCNRV). Net realizable value (NRV) is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If NRV is below cost, you write the inventory down to NRV and recognize the loss in cost of goods sold (or as a separate line) in the period of decline. Inventory measured using LIFO or the retail inventory method continues to use the older lower of cost or market (LCM) rule, where 'market' is replacement cost subject to a ceiling (NRV) and floor (NRV minus normal profit margin).
Elements breakdown
Scope — which inventory uses LCNRV
FASB ASC 330-10-35 prescribes LCNRV for inventory not measured under LIFO or the retail method. Everything else (FIFO, weighted-average, specific identification) uses LCNRV.
- Identify the cost-flow assumption first
- FIFO or weighted-average → use LCNRV
- LIFO or retail method → use LCM (ceiling/floor)
- Apply the test at each reporting date
Computing Net Realizable Value (NRV)
NRV is the net cash the entity expects to collect from selling the inventory in the ordinary course of business.
- Start with estimated selling price
- Subtract estimated costs to complete
- Subtract estimated costs to sell or dispose
- Subtract estimated transportation costs
- Do NOT subtract a normal profit margin under LCNRV
Common examples:
- Selling price $100, completion $10, selling cost $5 → NRV = $85
Comparing cost to NRV
Compare the historical cost of each inventory item (or logical group) to its NRV. The lower figure is reported on the balance sheet.
- Determine cost per unit (or group)
- Determine NRV per unit (or group)
- Carry inventory at the lower amount
- Apply item-by-item, category, or total — be consistent
Recognizing the write-down
When NRV is below cost, recognize a loss in the period of the decline.
- Debit Cost of Goods Sold (or Loss on Inventory Write-down)
- Credit Inventory (or an Allowance to Reduce Inventory)
- Disclose if the loss is material and not in COGS
- Do not capitalize the loss into future periods
Reversal of write-downs
Under U.S. GAAP, a write-down establishes a new cost basis. Recoveries are NOT recognized.
- New cost basis = written-down amount
- No write-up if NRV later recovers
- Contrast with IFRS (IAS 2): IFRS allows reversal up to original cost
- Tested frequently as a US GAAP vs. IFRS distinction
LCM (legacy rule for LIFO and retail method)
Under LCM, market = replacement cost, but constrained by a ceiling and floor.
- Ceiling = NRV (selling price − completion − disposal costs)
- Floor = NRV − normal profit margin
- Designated market value = middle of replacement cost, ceiling, floor
- Compare designated market to cost; carry at the lower
Common patterns and traps
The Normal-Profit Subtraction Trap
The question gives you a FIFO or weighted-average inventory and asks for the carrying value. A wrong answer subtracts a 'normal profit margin' from selling price along with completion and disposal costs. That subtraction belongs to the LCM floor calculation — it has no place in LCNRV. Candidates who learned LCM first or who studied old materials reflexively subtract the profit margin and arrive at a write-down that is too large.
A choice that computes NRV as $50 − $4 (completion) − $3 (disposal) − $5 (normal profit) = $38, when the correct LCNRV NRV is $43.
The IFRS-Reversal Trap
After a prior-period write-down, the inventory's NRV recovers. The question asks how much of the recovery to recognize. Under U.S. GAAP, the answer is zero — the write-down created a new cost basis. The trap choice recognizes the recovery (sometimes capped at original cost), which is the IFRS rule under IAS 2. Watch for the standard cited in the question; if it says ASC 330 or U.S. GAAP, no reversal.
A choice that adds back the prior write-down up to original cost when NRV later increases, citing 'recovery of value' in a U.S. GAAP fact pattern.
The Wrong-Cost-Method Trap
The question states that the company uses LIFO or the retail method but the candidate applies LCNRV anyway, ignoring the carve-out in ASC 330-10-35. LIFO and retail still use LCM with ceiling and floor. Trap answers compute NRV directly and skip the replacement-cost analysis entirely, producing a number that ignores half the rule.
A LIFO inventory with replacement cost of $40, NRV of $43, NRV-minus-normal-profit of $36, and historical cost of $42 — and the wrong choice carries it at $43 (NRV) instead of $40 (designated market).
The Selling-Cost Omission
The question gives a selling price and the candidate uses it as NRV without subtracting completion and disposal costs. This produces a carrying value that is too high — possibly missing a write-down entirely. The trap appears in fact patterns where selling costs are mentioned but buried among other figures (commissions, freight-out, finishing costs).
A choice that uses gross selling price of $50 as NRV without subtracting the $4 of completion and $3 of selling costs.
How it works
Picture Reyes Manufacturing, Inc., which uses FIFO for its widget inventory. At year-end, Reyes holds 1,000 widgets at a per-unit cost of $42. The widgets currently sell for $50 each, but Reyes will incur $4 of finishing costs and $3 of selling costs per unit before delivery. NRV per widget is $50 − $4 − $3 = $43, which is above the $42 cost — so no write-down. Now suppose that demand softens and the selling price drops to $46. NRV becomes $46 − $4 − $3 = $39, which is below the $42 cost. Reyes must write the inventory down by $3 per unit ($3,000 total) and charge that loss to COGS in the current period. The new cost basis is $39; even if widget prices rebound next quarter, Reyes cannot write the inventory back up. That irreversibility is a US GAAP rule, not an IFRS rule — under IAS 2, the recovery would be allowed up to the original $42.
Worked examples
Under FASB ASC 330-10-35, at what total amount should Liu report the tile inventory on its December 31, Year 5 balance sheet?
- A $170,000
- B $160,000 ✓ Correct
- C $158,400
- D $138,400
Why B is correct: Liu uses FIFO, which requires the LCNRV test under ASC 330-10-35. NRV per case = $90 selling price − $6 completion − $4 disposal = $80. Cost per case is $85. The lower of $85 cost and $80 NRV is $80, so Liu reports 2,000 × $80 = $160,000. Normal profit margin is irrelevant under LCNRV — it only enters under the LCM floor for LIFO/retail inventory.
Why each wrong choice fails:
- A: This is 2,000 × $85, the historical cost. It ignores the LCNRV test entirely. NRV ($80) is below cost ($85), so a write-down is required. (The Selling-Cost Omission)
- C: This is 2,000 × $79.20, computed as $90 selling price × (1 − 12% normal profit) = $79.20. The candidate is using LCM-floor logic (subtracting normal profit) instead of pure LCNRV. (The Normal-Profit Subtraction Trap)
- D: This is 2,000 × $69.20 — selling price minus completion, disposal, AND a normal profit margin ($90 − $6 − $4 − $10.80). This double-counts the LCM floor inside an LCNRV calculation, producing an excessive write-down. (The Normal-Profit Subtraction Trap)
Under U.S. GAAP, at what amount should Galante report the olive oil inventory on its December 31, Year 4 balance sheet?
- A $310,000 ✓ Correct
- B $400,000
- C $445,000
- D $355,000
Why A is correct: Under FASB ASC 330-10-35, a write-down to NRV creates a new cost basis. Recoveries of NRV are not recognized under U.S. GAAP. The Year 3 write-down reset Galante's cost to $310,000, and that figure remains the carrying value as long as it is at or below current NRV. (IFRS under IAS 2 would allow recovery up to $400,000, but the question specifies U.S. GAAP.)
Why each wrong choice fails:
- B: This restores the inventory to its original cost of $400,000, which is the IFRS treatment under IAS 2 — recovery is allowed up to original cost. U.S. GAAP prohibits any reversal of an inventory write-down. (The IFRS-Reversal Trap)
- C: This carries the inventory at the recovered NRV, ignoring both the original cost ceiling (which would limit recovery even under IFRS) and the U.S. GAAP rule against any reversal. Inventory is never carried above cost under either framework. (The IFRS-Reversal Trap)
- D: This is the midpoint between $310,000 and $400,000, which has no support in any accounting standard. There is no 'partial recovery' rule for inventory write-downs.
Under FASB ASC 330-10-35, at what per-unit amount should Marchetti carry this component on its December 31, Year 7 balance sheet?
- A $120
- B $122
- C $107 ✓ Correct
- D $95
Why C is correct: Because Marchetti uses LIFO, the lower of cost or market (LCM) rule applies, not LCNRV. Market = the middle of: replacement cost ($95), ceiling = NRV ($130 − $8 = $122), and floor = NRV minus normal profit ($122 − $15 = $107). Replacement cost ($95) is below the floor, so designated market is the floor of $107. Compare $107 to cost of $120; the lower is $107, the per-unit carrying value.
Why each wrong choice fails:
- A: This is historical cost. Because designated market ($107) is below cost ($120), a write-down is required. Carrying at cost ignores the LCM test entirely. (The Wrong-Cost-Method Trap)
- B: This is the NRV ceiling ($130 − $8). Under LCM for LIFO, you don't simply use NRV — you must compare replacement cost to the ceiling/floor band and pick the middle value. Using the ceiling here ignores the floor constraint. (The Wrong-Cost-Method Trap)
- D: This uses replacement cost as designated market without applying the floor. Because $95 falls below the $107 floor, designated market is the floor ($107), not replacement cost ($95). Skipping the floor produces an excessive write-down. (The Wrong-Cost-Method Trap)
Memory aid
NRV = 'Selling price minus stuff to get it sold' (completion + disposal + transport). For LCNRV — that's it. For LCM, add the ceiling/floor sandwich.
Key distinction
LCNRV (FIFO/weighted-average) compares cost to NRV directly. LCM (LIFO/retail) compares cost to designated market, which is replacement cost squeezed between the NRV ceiling and the NRV-minus-normal-profit floor.
Summary
Inventory under FIFO or weighted-average is carried at the lower of cost or NRV (selling price minus completion and disposal costs); write-downs hit COGS and cannot be reversed under U.S. GAAP.
Practice select financial statement accounts: receivables, inventory, pp&e adaptively
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Start your free 7-day trialFrequently asked questions
What is select financial statement accounts: receivables, inventory, pp&e on the CPA Exam?
Under FASB ASC 330-10-35, inventory measured using FIFO or weighted-average must be reported at the lower of cost or net realizable value (LCNRV). Net realizable value (NRV) is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If NRV is below cost, you write the inventory down to NRV and recognize the loss in cost of goods sold (or as a separate line) in the period of decline. Inventory measured using LIFO or the retail inventory method continues to use the older lower of cost or market (LCM) rule, where 'market' is replacement cost subject to a ceiling (NRV) and floor (NRV minus normal profit margin).
How do I practice select financial statement accounts: receivables, inventory, pp&e questions?
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What's the most important distinction to remember for select financial statement accounts: receivables, inventory, pp&e?
LCNRV (FIFO/weighted-average) compares cost to NRV directly. LCM (LIFO/retail) compares cost to designated market, which is replacement cost squeezed between the NRV ceiling and the NRV-minus-normal-profit floor.
Is there a memory aid for select financial statement accounts: receivables, inventory, pp&e questions?
NRV = 'Selling price minus stuff to get it sold' (completion + disposal + transport). For LCNRV — that's it. For LCM, add the ceiling/floor sandwich.
What's a common trap on select financial statement accounts: receivables, inventory, pp&e questions?
Subtracting a normal profit margin under LCNRV (that's only for LCM)
What's a common trap on select financial statement accounts: receivables, inventory, pp&e questions?
Reversing a prior write-down under U.S. GAAP
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