2.4 Measurement of Inventory Subsequent to Initial Recognition Flashcards
Under the weighted-average cost method, inventories are measured at
the lower of cost or net realizable value
The original cost of an inventory item is above the replacement cost. The inventory item’s replacement cost is above the net realizable value. Under the lower-of-cost-or-market method, the inventory item accounted for using the retail inventory method should be valued at
A. Original cost
B. Replacement cost
C. Net realizable value less normal profit margin
D. Net realizable value
D. Net realizable value
Inventory accounted for using LIFO or the retail inventory method is measured at the lower of cost or market. Market is the current cost to replace inventory, subject to certain limitations. Market should not exceed a ceiling equal to NRV or be less than a floor equal to NRV-normal profit margin. Because replacement cost exceeds NRV, the ceiling is NRV.
In accounting for inventories, generally accepted accounting principles require departure from the historical cost principle when the utility of inventory has fallen below cost. Under the “lower-of-cost-or-market” rule, the term “market” means
A. Original cost minus allowance for obsolescence.
B. Original cost plus normal profit margin.
C. Replacement cost of the inventory.
D. Original cost minus cost to dispose.
C. Replacement cost of the inventory
Market is the replacement cost of the inventory as determined in the market in which the entity buys its inventory, not the market in which it sells to customers. It is limited to a ceiling amount equal to net realizable value and a floor amount equal to net realizable value minus a normal profit margin.
In accounting for inventories, GAAP require departure from the historical cost principle when the utility of inventory has fallen below cost. Inventory accounted for under certain cost flow methods can be measured at the lower of cost or net realizable value (NRV). The term “net realizable value (NRV)” as defined here means
A. Estimated selling price minus estimated costs of completion and disposal
B. Original cost minus normal profit margin
C. Fair value minus normal profit margin
D. Fair value minus cost to sell
A. Estimated selling price minus estimated costs of completion and disposal
Inventory measured using any cost method other than LIFO or retail (e.g., FIFO or average cost) must be measured at the lower of cost or NRV. NRV is the estimated selling price in the ordinary course of business, minus reasonably predictable costs of completion, disposal, and transportation.
Stockholm Co. accounts for its inventory using the last-in, first-out (LIFO) method. The data below concern items in Stockholm Co.’s inventory.
- Gear
Historical cost: $190
Selling price: 217
Cost to complete and sell: 19
Current replacement cost: 203
Normal profit margin: 32 - Stuff
Historical cost: $106
Selling price: 145
Cost to complete and sell: 8
Current replacement cost: 105
Normal profit margin: 29 - Wickets
Historical cost: $53
Selling price: 73.75
Cost to complete and sell: 2.50
Current replacement cost: 51
Normal profit margin: 21.25
The market amount that Stockholm Co. should use to measure the wickets on the basis of the lower-of-cost-or-market (LCM) rule is
A. $50
B. $53
C. $71.25
D. $51
D. $51
Inventory accounted for using LIFO or retail inventory method is measured at the lower of cost or market (LCM). Market is the current cost to replace the inventory, subject to certain limitations. Market should not exceed a ceiling (NRV) or be less than a floor (NRV - normal profit margin)..
Net realizable value for wickets is 71.25 (73.75 selling price - 2.50 completion and disposal costs). The NRV - normal profit is $50 (71.25 NRV - 21.25 normal profit margin). The $51 replacement cost falls between the $71.25 ceiling and the $50 floor and is the appropriate market value. Because the $51 market value is lower than the $53 historical cost, it should be the basis of valuation for the wickets.
The replacement cost of an inventory item is below the net realizable value and above the net realizable value less the normal profit margin. The original cost of the inventory item is below the net realizable value less the normal profit margin. Under the lower-of-cost-or-market (LCM) method, the inventory item should be valued at
A. Original cost
B. Net realizable value less the normal profit margin
C. Net realizable value
D. Replacement cost
A. Original cost
When replacement cost is below the NRV and above the NRV less the normal profit margin, market equals replacement cost. Given that the original cost of the inventory item is below market, the original cost should be used to measure the inventory item under the LCM method.
Stockholm Co. accounts for its inventory using the first in, first out (FIFO) method. The data below concern items in Stockholm Co.’s inventory.
- Gear
Historical cost: $190
Selling price: 217
Cost to complete and sell: 19
Current replacement cost: 203
Normal profit margin: 32 - Stuff
Historical cost: $106
Selling price: 145
Cost to complete and sell: 8
Current replacement cost: 105
Normal profit margin: 29 - Wickets
Historical cost: $53
Selling price: 73.75
Cost to complete and sell: 2.50
Current replacement cost: 51
Normal profit margin: 21.25
Under IFRS, what amount should Stockholm Co. compare with historical cost to measure the amount at which the wickets should be measured?
A. $50
B. $53
C. $71.25
D. $51
C. $71.25
inventory is recorded at cost. However, inventory must be written down if its utility is no longer as great as its cost. To make this determination under IFRS, historical cost is compared with the inventory’s net realizable value (NRV). NRV is the estimated selling price in the ordinary course of business minus estimated costs of completion and sale. NRV for the wickets is $71.25 ($73.75 selling price – $2.50 estimated costs of completion and sale).
Based on a physical inventory taken on December 31, a company determined its chocolate inventory on a LIFO basis at $26,000 with a replacement cost of $20,000. The company estimated that, after further processing costs of $12,000, the chocolate could be sold as finished candy bars for $40,000. The company’s normal profit margin is 10% of sales. Under the lower-of-cost-or-market rule, what amount should the company report as chocolate inventory in its December 31 balance sheet?
A. $24,000
B. $28,000
C. $20,000
D. $26,000
A. $24,000
Market equals current replacement cost subject to maximum and minimum values. The maximum is NRV, and the minimum is NRV minus normal profit. When replacement cost is within this range, it is used as market. Cost is given as $26,000. NRV is $28,000 ($40,000 selling price – $12,000 additional processing costs), and NRV minus a normal profit equals $24,000 [$28,000 – ($40,000 × 10%)]. Because the lowest amount in the range ($24,000) exceeds replacement cost ($20,000), it is used as market. Because market value ($24,000) is less than cost ($26,000), it is also the inventory amount.
Kusta Company measures its year-end inventory using the weighted-average method. The following is relevant information:
Costs of completion, disposal, and transportation $ 25,000
Estimated selling price 450,000
Current replacement cost 420,000
Normal profit margin 40,000
Cost 400,000
The amount of ending inventory reported in the statement of financial position is
A. $420,000
B. $425,000
C. $450,000
D. $400,000
D. $400,000
Inventory accounted for using a method other than LIFO or retail (e.g., FIFO, average cost, or specific identification) is measured subsequent to acquisition at lower of cost or net realizable value (NRV). NRV equals (1) the estimated selling price in the ordinary course of business minus (2) reasonably predictable costs of completion, disposal, and transportation. Accordingly, the year-end weighted-average inventory is measured at the lower of cost ($400,000) or NRV [($450,000 sales price – $25,000 costs to complete, etc.) = $425,000], that is, the $400,000 historical cost.
Which of the following is true regarding inventory adjustments under IFRS?
A. Reversals of adjustments are allowed in a subsequent period.
B. A reversal of a previous write-down may be higher than the previous write-down.
C. Adjustments may not be reversed in a subsequent period.
D. IFRS do not require inventory adjustments.
A. Reversals of adjustments are allowed in a subsequent period.
Both IFRS and U.S. GAAP require the cost of inventory to be written down if the utility of the goods is impaired. Under IFRS, inventories are measured subsequent to initial recognition at the lower of cost and net realizable value (NRV), with NRV assessed each period. Moreover, unlike U.S. GAAP, IFRS permit inventory to be written up to the lower of cost and NRV if previously written down. The reversal is permissible only to the extent of the prior write-down.
