Inventory Flashcards
Lower of Cost or Market
Market (take middle of three)
Net realizable value (ceiling) $.90
Net realizable value less Normal profit margin (floor) .80
Replacement cost .70
Original cost .85
Lower of cost or market (take lower of two)
Which is net realizable value less normal profit margin
$.80
Under U.S. GAAP, inventory is valued at the lower of cost or market. Market is defined as
median value of the market ceiling, market floor, and replacement cost
LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?
COGS - increase
Net Income - decrease
Ending Inventory - decrease
COGS including consignees
Beginning inventory
Add: Purchases Freight in Transportation to consignees Cost of goods available for sale
Less: ending inventory Held by Company Held by consignees = Cost of goods sold
If the replacement cost is the market value and inventory is reported at replacement cost
replacement cost is lower than the original cost
Applying the lower of cost or market rule (item by item) separately to “each item” results
lowest inventory amount.
F.O.B. shipping point means
Because the goods are in transit, the buyer should have included them in inventory. By not including them, inventory and assets are understated. An understatement of ending inventory results in an overstatement of cost of goods sold, which results in an understatement of net income and retained earnings.
What is the appropriate treatment for goods held on consignment?
While an agent (consignee) will hold and sell goods on behalf of the consignor, until the inventory is sold, the seller (consignor) will include in his/her inventory because title and risk of loss are retained by the consignor.
If the replacement cost is between the ceiling and the floor
Market Price = Replacement Cost
replacement cost > Ceiling
Market Price = Ceiling
Replacement Cost
Market Price = Floor
LCM Steps-by-step
Step 1 : NRV ( Ceiling )
Step 2: Floor
Step 3 : Determine market price
Step 4 : Lower of Cost or Market
COGS formula
Beg Inventory
\+ Purchases
(Purchase Discounts)
\+ Freight-in
( Ending Inventory)
COGS
FIFO rising prices
COGS decrease
Ending Inventory increases
FIFO Falling Prices
COGS - increases
Ending Inventory - decreases
