You have learned that inventory may be written down to its current replacement cost or its...

You have learned that inventory may be written down to its current replacement cost or its net realizable value if these amounts are lower than original cost. Why do you think the accounting profession has decided to violate the cost concept and reduce the value of inventory in these circumstances?

Solutions

Expert Solution

Valuation of inventory is done at lower of cost or market value (LCMV).

Cost of inventory refers to historical cost of inventory, whereas market value of inventory refers to Net Realizable Value or replacement cost (if net realizable value is not available).

This implies that inventory cannot be valued above its cost but it can be written down to its market value (if it is less than cost). This treatment reduces the reported profit as closing value of inventory is valued below cost. This treatment is in line with the principle of prudence (or Conservatism), where provisions are made for all known expenses and losses (whether they are certain or uncertain).

Another reason can be, if inventory is valued at market value it represents fair market value of asset as on the balance sheet date. Fair value of asset on balance sheet date helps the viewer of financial statement in better decision making.

ekkarill92 answered 8 months ago

Next > < Previous

Related Solutions

You have now read and learned about fiscal policy and the impact that it may have...

You have now read and learned about fiscal policy and the impact that it may have on our debt. With everything you have learned thus far, do you believe that fiscal policy is a good thing for the economy? In what ways may it be bad and/or good for the economy? If you could choose between Keynsian Fiscal Policy or letting the economy self-correct what would you choose?

The ________ method to settle claims is based on the current replacement cost of a damaged...

The ________ method to settle claims is based on the current replacement cost of a damaged or lost item less depreciation. Question 5 options: A) actual cash value B) replacement value C) personal property floater D) endorsement E) umbrella tax credit of $50 for a person in a 28 percent tax bracket would reduce a person's taxes owed by: Question 6 options: A) $14 B) $10 C) $35 D) $28 E) $50 A taxpayer with a taxable income of $47,856...

Question 1: This question may be completed independently or as a group exercise. You have learned...

Question 1: This question may be completed independently or as a group exercise. You have learned that humans have 46 total chromosomes, and chimpanzees have 48 total chromosomes. Use other textbooks in biological anthropology and biology (or reputable online resources) to find the number of chromosomes in other organisms. Give an organism with considerably more chromosomes than humans. Give an organism with considerably fewer chromosomes than humans. Did your findings surprise you? What did your research suggest about the relationship...

As you may have learned in courses in microeconomics, whenworkers’ wages rise, their decision about...

As you may have learned in courses in microeconomics, when workers’ wages rise, their decision about how much time to spend working is affected in two conflicting ways. The income effect is the impulse to work less because greater incomes mean workers can afford to consume more leisure. Thesubstitution effect is the impulse to work more because the reward for working an additional hour has risen (equivalently, the opportunity cost of leisure has gone up).Productivity increases have pushed real wages...

Choose at least two concepts in financial reporting you have learned and explain how you may...

Choose at least two concepts in financial reporting you have learned and explain how you may use them in your present or future accounting position. Make sure you provide details to include how each concept will help you support the financial goals of the company you currently work for or will work for in the future.

Choose at least two concepts in financial reporting you have learned and explain how you may...

(A) As a current or future business owner, reflect on what new information you have learned...

(A) As a current or future business owner, reflect on what new information you have learned in this unit that will impact how you will run or would plan to run your businesses. For example, has anything you have read or discussed changed what business area you are interested in or altered your conceptions of how you run or might run your business?

Historical cost Estimated selling price Cost of completion Cost of disposal Current replacement cost Normal profit...

Historical cost Estimated selling price Cost of completion Cost of disposal Current replacement cost Normal profit margin 1. $60 $70 -- $5 $55 $7 2. $50 $80 $20 $6 $53 $3 3. $45 $44 $3 $2 $40 $4 4. $29 $40 $4 $6 $28 $5 5. $100 $110 $15 $5 $82 $5 For each set of independent facts listed, determine the appropriate measure of a unit of inventory under U.S. GAAP and IFRS. Assume the LIFO method is used. 1....

When you purchase homeowner’s insurance, you have a choice of valuations, cost or replacement value. Obviously,...

When you purchase homeowner’s insurance, you have a choice of valuations, cost or replacement value. Obviously, replacement value will be higher than cost value and will carry a higher premium. What criteria would you use to decide which to choose? Prioritize the criteria you identified and explain why you ordered them.

Based on what you have learned about economic unions and the current issues facing the EU,...

Based on what you have learned about economic unions and the current issues facing the EU, do you think that NAFTA could become an economic union in the foreseeable future? Why or why not? Use your understanding of economic and monetary unions as well as your understanding of the cultures of the countries in NAFTA. Review the two arguments against the EU as outlined in the opening case. How do you feel that culture, politics, society, and history would impact...

Subjects