Chapter 12 - Lower of Cost and Net Realizable Value Flashcards
It provides that inventories shall be measured at lower of cost and net realizable value.
TRUE
It is the estimated selling price in the ordinary course of business LESS the estimated cost of completion and estimated cost of disposal.
Net realizable value
When will the cost of inventories not be recoverable?
- The inventories are damaged
- it becomes wholly or partially obsolete
- Selling price declined.
- Estimated cost of completion or disposal increased.
Inventories are usually written down to net realizable value on an ______
item by item or individual basis
If the cost is lower than the net realizable value
there is no accounting problem
If the net reliable value is lower than the cost
The inventory is measured at net realizable and the decrease in value is recognized.
Methods of accounting for inventory writedown
Direct method (COGS method) Allowance method (loss method)
The inventory is recorded at the lower cost or net realizable value and known as the cost of goods sold method because any loss on the inventory write-down or gain on reversal of inventory write-down is NOT ACCOUNTED FOR SEPARATELY but buried in COGS
Direct method
the inventory is recorded at cost and any loss on inventory write-down is accounted for separately
Allowance method
this method is also known as the loss method because the loss account “loss on inventory write-down” is debited and a valuation account “allowance for inventory write-down” is credited
allowance method
if the required allowance decreases, gain on reversal of inventory write-down is recorded
TRUE
It is an obligation of the entity to acquire certain goods sometime in the future at a fixed price and fixed quantity.
purchase commitments
If there is a decline in purchase price after a purchase commitment has been made, a loss is recorded in the period the price decline.
TRUE
