Question

how do you find the lower cost market value

Answer 1

The steps to finding lower of cost or market value are:

1. First step is to determine the purchase price or cost.

2. Second step is determining the replacement cost. Replacement cost is equal to the market value.

3. In next step, Replacement cost is compared to net realizable value and net realizable value less a normal profit margin.

Then If:
A. Replacement cost is higher than net realizable value, Net realizable value will be used for replacement cost.
B. Replacement cost is lower than net realizable value less a normal profit margin, then net realizable value less a profit margin will be used for replacement cost.
C. Replacement cost is higher than Net realizable value less a normal profit margin but lower than net realizable value, then replacement cost will be used.

4. In next step, the cost is compared with the replacement cost.

And Finally, if:
Cost of inventory is lower than replacement cost, a write-down to cost is not required, which means cost is considered.
But if, Cost of inventory is higher than replacement cost, write-down of cost to replacement cost is done, which means replacement cost is considered.

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