Question

York Co. sells one product, which it purchases from various suppliers. York’s trial balance at December 31, 2021, included the following accounts:

Sales (33,000 units @ $16)	$528,000
Sales discounts	7,500
Purchase	380,600
Purchase discounts	18,000
Freight-in	5,000
Freight-out	11,000

York Co.’s inventory purchase during 2021 were as follows:

	Units	Cost per Unit
Beginning inventory	7,000	$7.7
Purchases, quarter ended March 31	13,000	7.5
Purchase, quarter ended June 30	15,000	7.9
Purchases, quarter ended September 30	12,000	8.25
Purchases, quarter ended December 31	8,000	8.2
	55,000

Additional information:

1. York’s accounting policy is to report inventory in its financial statements at the lower of cost or net realizable value, applied to total inventory. Cost is determined under the FIFO method.
2. York has determined that, at December 31, 2021, the net realizable value was $8.00 per unit.

REQUIRED:

a)      Prepare York’s schedule of cost of goods sold, with a supporting schedule of ending inventory. York includes inventory write-down losses in cost of goods sold.

b)     Determine whether inventory should be reported at cost or net realizable value.

c)      Show the financial statements presentation of inventory and all related accounts.

d)     Explain, Inventory valued at the LCNRV is an example of which principle in accounting?

e)      Discuss why IFRS removed LIFO and considered it as going against certain accounting principles.

Answer 1

1)

Loss on written down = ending units * difference between net realizable value and cost

= 22000 * ((180400/22000)-8)

= 22000*(0.2)

=4400

b)

Inventory should be valued at lower of cost or net realizable value

Cost of Inventory under FIFO Method =

=180400 for remaining 22000 unit (Per unit $ 8.2)

Net realizable value of Ending Inventory = No of units at the end of period * Net realizable Value per unit

= 22000 units x $ 8 per unit

= 176000

the Ending Inventory should be recorded at $ 176000.

c)

Balance sheet extracts

Current Asset
Inventories	176000

d) IAS 2 provides guidance for determining the cost of inventories and the subsequent recognition of the cost as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

e)

The Last-In-First-Out (LIFO) method of inventory valuation, while permitted under the U.S. Generally Accepted Accounting Principles (GAAP), is prohibited under the International Financial Reporting Standards (IFRS). As IFRS rules are based on principles rather than exact guidelines, usage of LIFO is prohibited due to potential distortions it may have on a company’s profitability and financial statements. In principle, LIFO may create a distortion to net income when prices are rising (inflation); LIFO inventory amounts are based on outdated and obsolete numbers, and LIFO liquidations may provide unscrupulous managers with the means to artificially inflate earnings.

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