Question

In: Accounting

Accountants generally follow the lower of cost or market (LCM) basis of inventory valuations. Required: 1....

Accountants generally follow the lower of cost or market (LCM) basis of inventory valuations.

Required:

1. Define cost as applied to the valuation of inventories.

2. Define market as applied to the valuation of inventories

3. Why are inventories valued at the lower of cost or market? Discuss.

4. List the arguments against the use of the LCM method of valuing inventories.

Solutions

Expert Solution

1) Cost is the main component when there is inventory, as valuation of inventory is done on the basis of cost, and cost always includes all those expenses which incurred from conversion of raw material into work in progress and then into finished product, but it does include cost incurred after that , like selling and distribution expenses.

2) Market may be defines as price which paid in exchange of any unit of inventory with the same product having identical qualities, market always have limit on the price or amount. Ceiling is the upper limit also it is the net realisable value of inventory.

3) The LCM rule says that inventory should value at market price or cost whichever is lower, cost the value of that product incurred and market price is the price of identical product in the market, the unit remains in the balance (inventories) valued for the purpose of closing stock,

And this stock will be the opening for the upcoming period, valuation of that stock must be done on a fair basis that will cover all the components of cost, and also this rule plays fair role in most of the times, sometime when the product becomes obsolete or market price has declined then there may be loss.

4) Arguments

i) This rule ignore the principal of consistency, as it will value inventory on LCM basis which may be cost in one period or market price in other period

ii) This rule is not conservative for future profit purpose

iii) Most of the time it ignores the cost and allows the market price which leads that market is more substantive than cost


Related Solutions

Accountants generally follow the lower of cost or market (LCM) basis of inventory valuations. Required: 1....
Accountants generally follow the lower of cost or market (LCM) basis of inventory valuations. Required: 1. Define cost as applied to the valuation of inventories. 2. Define market as applied to the valuation of inventories 3. Why are inventories valued at the lower of cost or market? Discuss. 4. List the arguments against the use of the LCM method of valuing inventories.
Accountants generally follow the lower of cost or market (LCM) basis of inventory valuations. a. Define...
Accountants generally follow the lower of cost or market (LCM) basis of inventory valuations. a. Define cost as applied to the valuation of inventories b. Define market as applied to the valuation of inventories. c. Why are inventoies valued at the lower of cost or market? d. List the arguments against the use of the LCM method of valuing inventories.
How to calculate the cost of inventory using the lower of cost or market (LCM) inventory...
How to calculate the cost of inventory using the lower of cost or market (LCM) inventory valuation method? How to record the adjustment to write-down inventory under the LCM inventory valuation method?
Norton Corporation uses the Lower-of-Cost-or-Market (LCM) method, on an individual-item basis, in pricing its inventory items....
Norton Corporation uses the Lower-of-Cost-or-Market (LCM) method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2020, consists of products G, H, I, J, K, L, M and N. Relevant per unit data for these products appear below. Required: Compute 1) Net Realizable Value (NRV), 2) NRV - normal profit (show your detail calculation), and use the LCM rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2020, for the...
1. Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory...
1. Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 9. Inventory Item Inventory Quantity Cost per Unit Market Value per Unit (Net Realizable Value) Birch 43 $244 $231 Cypress 15 68 58 Mountain Ash 37 230 245 Spruce 49 151 170 Willow 43 113 111 Inventory at the Lower of Cost or Market Inventory Item Total Cost...
Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory at...
Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 10. Product Inventory Quantity Cost Per Unit Market Value per Unit (Net Realizable Value) Class 1: Model A 19 $299 $295 Model B 23   78 86 Model C 44 237   241 Class 2: Model D 9   78   83 Model E 9 244 228 a. Determine the value of the...
Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory at...
Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 10. Product Inventory Quantity Cost Per Unit Market Value per Unit (Net Realizable Value) Class 1: Model A 10 $164 $144 Model B 20   253 269 Model C 47 48   33 Class 2: Model D 26   48   37 Model E 35 49 37 a. Determine the value of the...
Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory at...
Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 10. Product Inventory Quantity Cost Per Unit Market Value per Unit (Net Realizable Value) Class 1: Model A 300 $140 $125 Model B 500   90 112 Model C 150 60   59 Class 2: Model D 800   120   115 Model E 400 140 145 a. Determine the value of the...
Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory at...
Lower-of-Cost-or-Market Inventory On the basis of the following data, determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 10. Product Inventory Quantity Cost Per Unit Market Value per Unit (Net Realizable Value) Class 1: Model A 32 $256 $251 Model B 8   94 79 Model C 18 178   194 Class 2: Model D 23   247   263 Model E 34 98 77 a. Determine the value of the...
Lower-of-Cost-or-Market Inventory On the basis of the following data: Product Inventory Quantity Cost per Unit Market...
Lower-of-Cost-or-Market Inventory On the basis of the following data: Product Inventory Quantity Cost per Unit Market Value per Unit (Net Realizable Value) Model A 13 $198 $223 Model B 42 63 56 Model C 36 126 144 Model D 13 241 237 Model E 33 144 152 Determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 9. Inventory at the Lower of Cost or Market Product Total...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT