Question

Splish Company follows the practice of pricing its inventory at the lower-of-cost-or-market, on an individual-item basis.

Item No.		Quantity			Cost per Unit			Cost to Replace			Estimated Selling Price			Cost of Completion and Disposal			Normal Profit
1320		1,600			$3.97			$3.72			$5.58			$0.43			$1.55
1333		1,300			3.35			2.85			4.34			0.62			0.62
1426		1,200			5.58			4.59			6.20			0.50			1.24
1437		1,400			4.46			3.84			3.97			0.31			1.12
1510		1,100			2.79			2.48			4.03			0.99			0.74
1522		900			3.72			3.35			4.71			0.50			0.62
1573		3,400			2.23			1.98			3.10			0.93			0.62
1626		1,400			5.83			6.45			7.44			0.62			1.24

From the information above, determine the amount of Splish Company inventory.

The amount of Splish Company’s inventory

$enter the dollar amount of Splish Company's inventory

Answer 1

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Lower of cost or market (LCM) is an inventory valuation method required for companies that follow U.S. GAAP. In the lower of cost or market inventory valuation method, as the name implies, inventory is valued at the lower of cost or market.

The market value of inventory is essentially the replacement cost of that inventory.

Net realizable value is the sale price of the inventory minus any costs incurred to prepare the inventory for sale. A normal profit margin is the average spread between the cost and sale price of the inventory.

However, there are some caveats for replacement value:

The replacement cost cannot exceed the net realizable value (NRV).

The replacement cost cannot be lower than net realizable value less a normal profit margin.

Here are the steps to valuing inventory at the lower of cost or market:

1. First, determine the purchase cost of inventory.

2. Second, determine the replacement cost of inventory. It is the same as the market value of inventory.

3. Compare replacement cost to net realizable value and net realizable value minus a normal profit margin. If:

Replacement cost > net realizable value, use net realizable value for replacement cost.

Replacement cost < net realizable value minus a normal profit margin, use net realizable value minus a profit margin for replacement cost.

Net realizable value minus a normal profit margin < replacement cost < net realizable value, use replacement cost.

4. Compare the cost of inventory to replacement cost. Lastly, if:

Cost of inventory < replacement cost, a write-down is not necessary.

Cost of inventory > replacement cost, write-down inventory to replacement cost.

The following is the answer to your question:

Item No.	Estimated Selling Price	Cost of Completion and Disposal	Ceiling NRV	Normal profit	Floor NRV	Replacement cost	Market value ( Middle value of c , e and f )
	(a)	(b)	(c=a-b)	(d)	(e=c-d)	(f)	(g)
1320	5.58	0.43	5.15	1.55	3.6	3.72	3.72
1333	4.34	0.62	3.72	0.62	3.1	2.85	3.10
1426	6.20	0.50	5.7	1.24	4.46	4.59	4.59
1437	3.97	0.31	3.66	1.12	2.54	3.84	3.66
1510	4.03	0.99	3.04	0.74	2.3	2.48	2.48
1522	4.71	0.50	4.21	0.62	3.59	3.35	3.59
1573	3.10	0.93	2.17	0.62	1.55	1.98	1.98
1626	7.44	0.62	6.82	1.24	5.58	6.45	6.45

Market value ( Middle value of c , e and f )	Cost Price PER UNIT	Unit LCM ( Min. Value of g or h )	Quantity	Inventory Value
(g)	(h)	(i)	(j)	(k = i * j )
3.72	3.97	3.72	1600	5952
3.10	3.35	3.10	1300	4030
4.59	5.58	4.59	1200	5508
3.66	4.46	3.66	1400	5124
2.48	2.79	2.48	1100	2728
3.59	3.72	3.59	900	3231
1.98	2.23	1.98	3400	6732
6.45	5.83	5.83	1400	33305
			Total	66610