Lower of cost or market Flashcards
When inventory market cost falls below book cost what must a firm do?
Inventory must be written down to market, loss cannot be postponed until period of sale.
If costmarket, a loss is recognized and the inventory is written down to market
How is the cost of ending inventory determined when analyzing lower of cost or market?
By applying one of the four cost flow assumptions (FIFO, LIFO, Weighted Average, Specification)
What is “Market” cost when analyzing lower of cost or market?
A replacement cost, subject to a range of values defined by an established ceiling value and an established floor value. The ceiling is Net Realizable Value. The floor is NRV less normal profit margin
Generally, what is replacement cost of inventory?
Market cost
How is the ceiling value of inventory calculated?
By reducing the sales price by the estimated cost to complete and sell the inventory
What if replacement cost of inventory is greater than the ceiling value established?
Then market is equal to ceiling value
If it is less than the floor value, market is equal to floor
List the formula to arrive at net realizable value
Sales price - estimated cost to complete and sell the inventory
List the steps in Lower of Cost or Market (LCM) analysis
- )Compute market value;
2. )Value inventory at lower of cost or market
What is the basis on which Lower of Cost or Market (LCM) can be applied?
- )Individual Item, Category, Total Inventory;
2. )But must be consistent from year to year.
How is holding loss of inventory reported under the allowance method?
Any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss, holding loss not included in COGS.
How is holding loss reported under the direct method?
Any holding loss related to inventory is simply included in cost of goods sold
List the methods of recording Lower of Cost or Market
Direct method or Allowance method
