Subsequent Measurement of Inventory

Question 1

When do you write down inventory?

Answer 1

If the market value of the inventory declines below the cost assigned by (LIFO, FIFO, WA). We have to market i down to the market value.

Question 2

How do you measure the write-down?

Answer 2

The amount of the write-down depends on the value used for subsequent measurement.

Question 3

When you have a write-down, when do you recognize the loss?

Answer 3

Immediately.

Once it is written down, you do not do a write-up

Question 4

What methods can be used to write-down inventory?

Answer 4

Lower of Cost or Net Realizable Value (LC-NRV)
- Applies to FIFO or Weighted Average

Lower of Cost or Market (LC-M)
- Applies to LIFO or Retail Inventory Method

Question 5

What is NRV?

Answer 5

Estimated selling price less cost to complete which includes transportation costs less cost to complete less cost of disposal.

If you cost from FIFO of WA is less than NRV, then there is NO WRITE DOWN. If it is more than cost, then you have to write down.

Question 6

How do you calculate Lower Cost or Market

Answer 6

Market is equal to REPLACEMENT COST subject to a ceiling or floor.

Ceiling= NRV 
Floor= NRV-Normal Profit Margin 

Replacement cost cannot be above the ceiling or below the floor.

Overall objective is if NRV or market is less than cost, the inventory is written down and a loss is recognized.