1) Lower of Cost or Market Inventories are valued at the lower-of-cost (e.g., FIFO) - or market. (replacement cost) LCM is a departure from historical cost . The method causes losses to be recognized in the period the value of inventory declines below its cost rather than in the period that the goods ultimately are sold.
Replacement cost (RC) = cost to buy (or manufacture) another item of inventory
RC Ceiling = net realizable value (NRV):
selling price less cost to dispose
RC Floor = NRV less normal profit margin
Ceiling: RC should be no higher than this #
Floor: RC should be no lower than this #
Determining Market Value (page 449) Ceiling NRV Replacement Cost NRV – NP Floor Designated Market Cost Not More Than Not Less Than Or Step 1 Determine Designated Market Step 2 Compare Designated Market with Cost Lower of Cost Or Market
Estimate ending inventory instead of physically counting the inventory
Less costly / Less time consuming
Sometimes necessary (natural disaster)
Two popular methods of estimating ending inventory are the . . .
Gross Profit Method
Retail Inventory Method
Gross Profit Method Useful when . . . Estimating inventory and COGS for interim reports . Determining the cost of inventory lost , destroyed, or stolen. Auditors are testing the overall reasonableness of client inventories. Preparing budgets and forecasts. NOTE: The Gross Profit Method is not acceptable for use in annual financial statements .