In: Accounting
Diversified Inc. is a retailer that sells a variety of goods under three major business units. Its Home Appliances Division manufactures and sells home kitchen appliances such as refrigerators, microwave ovens and dishwashers.During his annual review of the company’s financial condition, Diversified’s president notes that the company’s inventory included a material reduction described as an allowance to reduce inventory to market. While the Home Appliances Division had received a considerable amount of negative publicity related to fires caused by defective switches in its products, the president felt that any reduction in the market value of these products that was taken in the third quarter was more than offset by the high margins the High Fashion Division. Therefore, the president felt that no write down should have been taken. Further, the president notes that the company had replaced the faulty switches in the third fiscal quarter and subsequent sales had shown that the market value of its appliances had partially recovered. All estimates are that the value of the appliance inventory should be completed recovered by the fourth quarter of the next fiscal year.Research the related generally accepted accounting principles and prepare a short memo to the accounting file not to exceed two pages that addresses the president’s concerns. Cite your references and applicable paragraph numbers.
Answer
As per US GAAP , Inventory is subsequently measured at lower of cost or market. For this purpose. market is defined as current replacement cost which is limited to net realizable value.
However, in a strong amendment in 2015, the Financial Accounting Standards Board (FASB) has amended the above definition to extract the included in it. According to the revised standard inventory, the cost should be at the lower level or net recoverable value. Please note that the revised definition is not applicable for LIFO and retail list pricing methods. In these two cases the old definition will still continue.
It is also stated in the US GAAP that when an inventory is written, a new cost base is established and reversed in writing., Therefore, in the given case, since the date of balance sheet was less than the net realizable value of the list of domestic applications, it is advisable to write the list in the market. The fact is that the offset of a decrease in the market value of the inventory of kitchen appliances compared to the margins from the High Fashion Division is irrelevant.
Also, according to ASC 330, there is no possibility of retreating from writing inventory because market value can be recovered again