Question

Inventory TableClose

The following data pertain to Company A’s inventory that was purchased on January 5, Year 1, for $40,000:

	March 31, Year 1	June 30, Year 1	December 31, Year 1
Estimated selling price	$42,000	$44,000	$41,000
Cost of disposal	2,000	2,000	2,500
Normal profit margin	1,200	1,400	1,100
Cost of completion	1,000	1,000	1,000
Current replacement cost	38,000	42,000	36,000

Note: Entire inventory was sold on May 1, Year 2.

EmailClose

To:	Bill West
From:	Rufus Brown
Date:	June 1, Year 2
RE:	GAAP vs. IFRS

Hey Bill,

As you have probably already seen, there is a great newspaper article detailing the company’s plans to go global. You will notice that the biggest challenge that we face is learning the new accounting standards (IFRS). To get us started, I will need your help in calculating some of the Year 1 quarterly inventory balances under both U.S. GAAP policy and IFRS policy. I know that this is a bit of a challenge, but I have ultimate faith in you. Let me know if I can do anything to help.

Sincerely,

Rufus

P.S. Remember that Company A accounts for its inventory using the LIFO method under U.S. GAAP and the FIFO method under IFRS.

Newspaper Article Announcing Global ExpansionClose

Company Seeks to Go Global

Company A is a publicly traded company that reports interim financial statements on a quarterly basis. Until recently, that is all that Company A has ever been. Now, Company A seeks to maintain their old traditions while simultaneously traversing the unknown seas into foreign lands, in the hopes of increasing their global market share.

“We really believe that going global will not only benefit our current employees and their families, but also the lives of potential future employees and their families,” the CEO stated when asked about the decision to go global. “I am really looking forward to leading the way in the greatest project that this company has ever undertaken,” the CEO continued, beaming with pride.

When asked about the challenges that lie ahead, the CEO responded, “Our biggest challenge so far has been learning the new accounting rules and regulations that are applied overseas. For the most part they are similar to the regulations that we abide by here in the States, but there are some instances in which the two standards are wildly different.” However, despite whatever adversity might lie ahead, Company A has an attitude that cannot and will not be defeated.

Scroll down to complete all parts of this task.

Use the information provided in the exhibits to calculate the inventory amounts as they should be reported in the financial statements prepared under U.S. GAAP and IFRS. Enter the appropriate amounts in the associated cells. Enter all amounts as positive values. Round all amounts to the nearest whole number.

	U.S. GAAP	IFRS
1. Inventory balance on March 31, Year 1
2. Inventory balance on June 30, Year 1
3. Inventory balance on December 31, Year 1

Answer 1

	Differences in valuing and reporting Inventory as per USGAAP and IFRS
S.No.	Parameters	USGAAP	IFRS
1	Inventory Accounting Methods allowed	FIFO; LIFO; Weighted Average Cost; Specific Identification.	FIFO; Weighted Average. LIFO not allowed. Specific identification allowed for goods that are not normally interchangeable.
2	Measurement of Carrying Value	Lesser of Cost or Market Value (i.e, Current Replacement Cost limited by Net Realizable Value (NRV))	Lesser of Cost or Net Realizable Value (NRV)
3	Net Realizable Value	Estimated Selling Price less any reasonable costs associated with sale.	Estimated Selling Price Less Estimated Cost of Completion + Estimated cost of Sale

Inventory	U.S. GAAP See Note 1 & 2 below	IFRS See Note 3 below
1. Inventory balance on March 31, Year 1	38,000	39,000
2. Inventory balance on June 30, Year 1	38,000	39,000
3. Inventory balance on December 31, Year 1	36,400	37,500
Given:
Opening Balance of Inventory on January 5, Yr 1	$                 40,000.00
Ending Inventory as at May 1, Yr 2	$                               -

Working Notes:

Note for USGAAP

	USGAAP
Market =	Current cost to replace inventory subject to certain limitations.
Market cannot exceed	Ceiling = Net Realizable Value
Market cannot be less than	Net Realizable Value less Profit Margin
Original cost > Replacement cost.If replacement cost > NRV	Ceiling is NRV

Note 2 : Inventory Value as per USGAAP

			US GAAP
		Net Realizable Value (NRV) Calculations				Market					USGAAP Inventory Value = Cost / Market which ever is lower (i.e, Lower of 1 or 10.
							Ceiling	Floor		Market Value
Period ending	Cost	Estimated Selling Price-Given in Ques	Estimated cost of completion - Given in Ques	Cost of Disposal - Given in Ques	Net Realizable Value	Current Replacement Cost - Given in Ques	Net Realizable Value (NRV)	Normal Profit Margin - Given in Question	NRV Less Normal Profit Margin
	1	2	3	4	5=2-(3+4)	6	7	8	9= 5-8	10	11
Mar-31	40,000	42,000	1,000	2,000	39,000	38,000	39,000	1,200	37,800	38,000	38,000
Jun-30	38,000	44,000	1,000	2,000	41,000	42,000	41,000	1,400	39,600	41,000	38,000
Dec-31	38,000	41,000	1,000	2,500	37,500	36,000	37,500	1,100	36,400	36,400	36,400
On June 30, opening inventory = Closing Inventory as on March 31.

Note 3 : Inventory Value as per IFRS

			IFRS
		Net Realizable Value (NRV) Calculations					IFRS Inventory Value = Cost / Market which ever is lower (i.e, Lower of 1 or 6.
						Market Value = NRV
Period ending	Cost	Estimated Selling Price-Given in Ques	Estimated cost of completion - Given in Ques	Cost of Disposal - Given in Ques	Net Realizable Value
	1	2	3	4	5=2-(3+4)	6	7
Mar-31	40,000	42,000	1,000	2,000	39,000	39,000	39,000
Jun-30	39,000	44,000	1,000	2,000	41,000	41,000	39,000
Dec-31	39,000	41,000	1,000	2,500	37,500	37,500	37,500