In this chapter we complete our discussion of inventory measurement by explaining the lower-of-cost-or-market rule used to value inventories. In addition, we investigate inventory estimation techniques, methods of simplifying LIFO, changes in inventory method, and inventory errors. | Inventories: Additional Issues Chapter 9 Chapter 9: Inventories: Additional Issues We covered most of the principal measurement and reporting issues involving the asset inventory and the corresponding expense cost of goods sold in the previous chapter. In this chapter we complete our discussion of inventory measurement by explaining the lower-of-cost-or-market rule used to value inventories. In addition, we investigate inventory estimation techniques, methods of simplifying LIFO, changes in inventory method, and inventory errors. Reporting —Lower of Cost or Market Inventories are valued at the lower of cost or market (LCM). 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. Inventories are to be valued on the balance sheet at lower of cost or market (LCM). Initially, inventory items are recorded at their historical costs, but a departure from cost is warranted when the utility of an asset (the probable future economic benefits) is no longer as great as its cost. Deterioration, obsolescence, changes in price levels, or any situation that might compromise the inventory’s salability impairs the utility of the inventory. Using LCM 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. Determining Market Value Market Should Not Exceed Net Realizable Value (Ceiling) Market Should Not Be Less Than Net Realizable Value less Normal Profit (Floor) GAAP defines “market value” in terms of current replacement cost. Market should not be greater than the “ceiling” or less than the “floor.” Ideally, market would be measured as replacement cost of the inventory item. However, the inventory’s current replacement cost must fall between the net realizable value (estimated selling price in the ordinary course of business less the . | Inventories: Additional Issues Chapter 9 Chapter 9: Inventories: Additional Issues We covered most of the principal measurement and reporting issues involving the asset inventory and the corresponding expense cost of goods sold in the previous chapter. In this chapter we complete our discussion of inventory measurement by explaining the lower-of-cost-or-market rule used to value inventories. In addition, we investigate inventory estimation techniques, methods of simplifying LIFO, changes in inventory method, and inventory errors. Reporting —Lower of Cost or Market Inventories are valued at the lower of cost or market (LCM). 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. Inventories are to be valued on the balance sheet at lower of cost or market (LCM). Initially, inventory items are recorded at their historical costs, but a .
