Question

Rowan Company has four different categories of inventory. The quantity, cost, and market value for each of the inventory categories are as follows: Item Quantity Cost Per Unit Market Value Per Unit 1 220 $ 4.40 $ 4.60 2 130 $ 6.20 $ 6.00 3 100 $ 10.00 $ 9.25 4 25 $ 20.50 $ 19.00 The company carries inventory at lower-of-cost-or-market applied to the entire stock of inventory in the aggregate. How would the implementation of the lower-of-cost-or-market rule impact the elements of the company’s financial statements? a. Have no effect on total assets or stockholders’ equity. b. Decrease total assets and stockholders’ equity by $94.50. c. Increase total assets and stockholders’ equity by $94.50. d. Decrease total liabilities and stockholders’ equity by $94.50.

Answer 1

Item	Qty	Cost Per Unit	Market Value Per Unit	Total Inventory Value using cost	Total Inventory Value using market value
1	220	4.40	4.60	968.0	1,012.0
2	130	6.20	6.00	806.0	780.0
3	100	10.00	9.25	1,000.0	925.0
4	25	20.50	19.00	512.5	475.0
	Total			3,286.5	3,192.0
Total Inventory Value using cost	3,286.5
Total Inventory Value using market value	3,192.0
Difference		94.50
Correct Option B
Reason: Inventory value using market value is 94.50 lower than inventory value using Cost. Which is thery by decreasing total asset and total stockholder's liability.