You have been asked by the financial vice president to develop a short presentation on the lower-of-cost-or-market method for inventory purposes.

You have been asked by the financial vice president to develop a short presentation on the lower-of-cost-or-market method for inventory purposes. The financial VP needs to explain this method to the president, because it appears that a portion of the company’s inventory has declined in value.

Instructions

The financial VP asks you to answer the following questions.

(a) What is the purpose of the lower-of-cost-or-market method?

(b) What is meant by market?

(c) Do you apply the lower-of-cost-or-market method to each individual item, to a category, or to the total of the inventory? Explain.

(d) What are the potential disadvantages of the lower-of-cost-or-market method?

Solutions

Expert Solution

Lower of cost and market value is used for calculating inventory values. Here market is defined as the replacement cost. If the current market cost of inventory is less than the total cost of inventory than market cost is written down for the accounting purposes and left amount as the losses. Here ceiling limitation when market cost is less than total cost it shows loss in the future. And floor when market cost is more than total cost it shows future profit margin.

Lower of cost and market value is used for calculating inventory values.

Junaid answered 2 years ago

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