2.4 Measurement of Inventory Subsequent to Initial Recognition

Question 1

Under the weighted-average cost method, inventories are measured at

Answer 1

the lower of cost or net realizable value

Question 2

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

Answer 2

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.

Question 3

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.

Answer 3

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.