Inventory Measurement

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $102. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

$100 Reason: Ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $102. Market is the middle of these three values so = $102 compared to cost of $100. Cost is lower so record at cost.

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $106. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

$100 Reason: Ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $106. Market is the middle of these three values so = $104 compared to cost of $100. Cost is lower so record at cost.

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at

$100 Reason: Lower of cost and net realizable value is required. The NRV is $104, but the cost of $100 is lower.

Linden Company has three inventory items. Utilizing the lower of cost and net realizable value rule, Linden determines the following: Item A: cost exceeds net realizable value by $20 Item B: cost is $10 lower than net realizable value Item C, cost is $5 lower than net realizable value. If Linden applies the rule to individual items, it should recognize a loss of

$20. Reason: When applying the rule to individual items, only item A has a market value below cost so a $20 loss is recorded.

Linden Company has three inventory items. Utilizing the lower of cost and net realizable value rule, Linden determines the following: Item A: cost is $40; net realizable value is $20 Item B, cost is $10; net realizable value is $20 Item C, cost is $5; net realizable value is $10 If Linden applies the rule to its entire inventory, it should recognize a loss of

$5 Reason: Item A has a cost higher than net realizable value and B and C have a cost lower than NRV. -$20 + $10 + $5 = $5 loss. Total cost is $55, total NRV is $50

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $95. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

$95 Reason: Ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $95. Market is the middle of these three values so = $95 compared to cost of $100. Market is lower so record at market.

Jones Company's inventory cost is $100. The expected sales price is $110. The company estimates sales cost as 10% of the sales price. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at

$99 Reason: Lower of cost and net realizable value is required. The NRV is $110-11 = 99 and is lower than cost.

Which of the following statements regarding inventory valuation is correct?

Both U.S. GAAP and IFRS require that inventory is valued at the lower of cost or net realizable value.

At the end of the year, inventory has a cost of $200,000, net realizable value of $195,000, replacement cost of $160,000, and normal profit margin of $25,000. Assuming normal business circumstances, prepare the year-end adjusting entry, if any, for inventory using the lower of cost or market approach.

COGS $30,000 Inventory $30,000

At the end of the year, inventory has a cost of $200,000 and a net realizable value of $195,000 due to normal business circumstances. Prepare the year-end adjusting entry, if any, for inventory using the lower of cost or net realizable value approach.

COGS 5,000 Inventory 5,000

Ziegler Company properly applies the lower of cost and net realizable value rule and determines that its inventory value has declined below cost. Which of the following methods may Ziegler use to adjust its inventory to market value?

Recognize the write-down as a separate line item. Recognize the write-down as an addition to cost of goods sold.

Smith Company has several current product lines. In the past, the company applied the lower of cost and net realizable value method to individual inventory items. The company wants to make the process less time consuming and is exploring alternatives. What alternatives does the company have?

Smith could apply the lower of cost and net realizable rule to its entire inventory. Smith could apply the lower of cost and net realizable value rule to each product line.

True or false: Both U.S. GAAP and IFRS require inventory to be valued at the lower of cost and net realizable value.

True

True or false: For financial reporting purposes, the lower of cost and net realizable value method can be applied to individual inventory items, categories of inventory, or the entire inventory.

True Reason: GAAP allows LCNRV to be applied to individual, categories of, or the entire inventory.

GAAP requires companies to report inventory

at the lower of cost and net realizable value for companies using FIFO. at the lower of cost or market value for companies using LIFO.

The lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the cash it can provide.

Merger Company applies the lower of cost and net realizable value rule to individual inventory items. If the company were to apply the rule to the entire inventory balance, the chance of recording an inventory loss would

decrease.

Net realizable value of inventory is determined by subtracting selling cost from the

expected sales price

The selling price of inventory less any costs of completion, disposal, and transportation is

net realizable value.

If inventory values recover after a lower of cost and net realizable value write-down, the write-down must

not be reversed.

Doris Company wrote down its inventory under the lower of cost and net realizable value rule by $10,000. Subsequent to the write-down, inventory values recover by $8,000. Doris Company must

not recognize the increase.

Mauser Company properly applies the lower of cost or net realizable value rule and determines that its inventory value has declined by $10,500 below cost. Which of the following could be debited for this write-down?

other loss or expense cost of goods sold

The lower of cost or net realizable value approach is _____ for companies that use _____.

required under GAAP; a method other than LIFO or retail inventory

The lower of cost and net realizable value rule causes income to be reduced in the period when

the inventory value declines below cost.