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CPA Exam: FAR · Select Balance Sheet Accounts

CPA Exam: FAR: Inventory, PP&E, and Intangibles Concepts

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Overview

This chapter covers the long-lived and operating assets that a business uses to make sales: inventory, property, plant, and equipment, and intangible assets. The common question for all three is what goes into cost, how that cost is moved to expense, and what happens if the asset loses value.

Inventory cost includes the price paid plus costs to get the goods ready for sale, such as freight-in. Cost flow methods include FIFO, LIFO, and average cost. Inventory measured by FIFO or average cost is carried at the lower of cost and net realizable value, while LIFO and the retail method still use lower of cost or market.

Property, plant, and equipment is recorded at all costs needed to get the asset ready for its intended use, including freight, installation, and testing, and is then depreciated over its useful life. If events suggest an asset held and used may not be recoverable, the company compares its carrying amount with undiscounted future cash flows; if those are lower, it writes the asset down to fair value.

Intangibles with finite lives are amortized, while goodwill and indefinite-life intangibles are not amortized but are tested for impairment, though private companies may elect to amortize goodwill. Research and development costs are generally expensed as incurred.

Key concepts

  • Lower of cost and net realizable value

    For inventory measured by FIFO or average cost, inventory is written down if net realizable value (estimated selling price less reasonably predictable costs of completion, disposal, and transport) falls below cost.

    Memory tipLIFO and retail inventory method use lower of cost or market instead.

    Source: FASB ASC 330 · as of 2026

  • Capitalized PP&E costs

    Cost includes the purchase price and all costs needed to bring the asset to the condition and location for its intended use, such as freight, installation, site preparation, and testing. Interest during construction of qualifying assets is also capitalized.

    Memory tipRoutine repairs and maintenance are expensed.

    Source: FASB ASC 360 · as of 2026

  • Impairment of assets held and used

    Step 1: if the carrying amount is more than the sum of undiscounted future cash flows, the asset is not recoverable. Step 2: the loss equals carrying amount minus fair value.

    Memory tipOnce written down, a held-and-used asset cannot be written back up under US GAAP.

    Source: FASB ASC 360 · as of 2026

  • Goodwill

    The excess of the price paid in a business combination over the fair value of identifiable net assets acquired. It is not amortized and is tested for impairment at least annually; the loss is the amount by which a reporting unit's carrying amount exceeds its fair value, up to the goodwill amount.

    Memory tipA private company may elect to amortize goodwill, generally over ten years or less.

    Source: FASB ASC 350 · as of 2026

  • Finite vs. indefinite-life intangibles

    Finite-life intangibles such as patents are amortized over their useful lives. Indefinite-life intangibles such as some trademarks are not amortized and are tested for impairment.

    Memory tipInternally developed intangibles are generally expensed; purchased ones are capitalized.

    Source: FASB ASC 350 · as of 2026

  • Research and development

    R&D costs are generally expensed as incurred. Equipment with alternative future uses is capitalized and its depreciation is R&D expense.

    Memory tipSoftware developed for sale and internal-use software follow their own capitalization rules.

    Source: FASB ASC 730 · as of 2026

Often tested

  • FIFO and average cost: lower of cost and net realizable value; LIFO and retail: lower of cost or market.
  • Freight-in is part of inventory cost; freight-out is a selling expense.
  • Capitalize costs to get PP&E ready for use; expense ordinary repairs.
  • Impairment recoverability test uses undiscounted cash flows; the loss uses fair value.
  • Goodwill is not amortized for public companies; it is tested for impairment.

Easy to confuse: Capitalize vs. expense

ItemCapitalizeExpense
Freight and installation of new machineYesNo
Routine repairsNoYes
Research and developmentOnly equipment with alternative future usesR&D costs generally

3 sample questions

Verified practice questions from this unit.

Practice questionReviewedSelect Balance Sheet Accounts › Inventory, PP&E, and Intangibles★★★★★

Question 1. A company uses a periodic FIFO system. Beginning inventory is 100 units at $10. It buys 200 units at $12. It sells 220 units. What is ending inventory?

  1. ① $960
  2. ② $800
  3. ③ $880
  4. ④ $2,440
▼ Show answer and explanation▲ Hide answer and explanation

Answer: ① $960

Key point: FIFO: ending inventory = most recent costs

Under FIFO, the first units bought are the first sold, so the units left are the newest ones.

  1. Units available: 100 + 200 = 300
  2. Units left: 300 − 220 = 80
  3. Ending inventory: 80 × $12 = $960

Check: COGS = $1,000 + 120 × $12 = $2,440; $2,440 + $960 = $3,400 = total cost available.

Wrong choices

  • $800: This uses the oldest $10 cost, which is LIFO thinking; under FIFO the oldest units are sold first.
  • $880: This uses an average-type cost of $11, not FIFO.
  • $2,440: This is cost of goods sold, not ending inventory.
Practice questionReviewedSelect Balance Sheet Accounts › Inventory, PP&E, and Intangibles★★★★★

Question 2. A company uses FIFO. One inventory item cost $50. Its expected selling price is $60, and the costs to finish and sell it are $15. At what amount should the item be reported?

  1. ① $50
  2. ② $60
  3. ③ $45
  4. ④ $35
▼ Show answer and explanation▲ Hide answer and explanation

Answer: ③ $45

Key point: FIFO/average: lower of cost and net realizable value

Inventory measured with FIFO or average cost is reported at the lower of cost and net realizable value (NRV). NRV is the selling price minus reasonable costs to complete and sell.

  1. NRV: $60 − $15 = $45
  2. Lower of $50 cost and $45 NRV = $45

Wrong choices

  • $50: Inventory must be written down when net realizable value is below cost.
  • $60: Inventory is never written up to selling price.
  • $35: Only the costs to finish and sell are subtracted; there is no normal profit deduction under the lower of cost and NRV rule.
Practice questionReviewedSelect Balance Sheet Accounts › Inventory, PP&E, and Intangibles★★★★★

Question 3. A company buys a machine for $50,000. It also pays $3,000 sales tax, $1,200 freight, and $800 installation. While installing it, its own workers damage a part, which costs $500 to repair. What cost should be capitalized for the machine?

  1. ① $55,000
  2. ② $55,500
  3. ③ $53,000
  4. ④ $50,000
▼ Show answer and explanation▲ Hide answer and explanation

Answer: ① $55,000

Key point: Capitalize costs needed to get the asset ready for use

An asset's cost includes the price plus all normal costs needed to get it in place and ready to use. Costs from mistakes or accidents are expensed.

  1. Price: $50,000
  2. Sales tax + freight + installation: $3,000 + $1,200 + $800 = $5,000
  3. Capitalized cost = $55,000

The $500 repair is an expense.

Wrong choices

  • $55,500: Repairing damage the company caused does not make the machine more useful; it is an expense.
  • $53,000: Freight and installation are needed to get the machine ready to use and must be capitalized.
  • $50,000: Sales tax, freight, and installation are all part of the machine's cost.
Practice 5 questions from this unit →