FASB Accounting Standards Codification: Questions
FASB ASC CITATION:
Adjustments to Lower of Cost or Market
330-10-35-1 A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost
The inventory has a financial importance as it is purchased and recorded at its historical cost or original cost. With respect to a perpetual inventory system, inventory accounts are continually controlled as goods are purchased and placed directly into the inventory account and then later taken out when sold. Therefore the inventory is properly recognized within the period it is sold. Furthermore valuing the inventory with FIFO correctly reports the ending inventory at its market value. When ending inventory is reported at market value, before making proper year adjustments unexpected changes occur in the ordinary course of business causing the market to be lower then the cost basis of the inventory. This departure from the cost basis of pricing the inventory requires the utility of inventory is no longer as great as its original cost. The ASC allows assets to be valued with Lower of Cost or Market when evidence is proving the future utility of the inventory drops below its historical cost.
The determination of the businesses cost basis for their current inventory and determination of the market calls for ruling the LCM with the conservatism principal to resolve the issue between these two divergent amounts (original cost of inventory and the market). Justification for applying Lower of Cost Or Market is the recognition of the holding loss resulting from the market being less then the company’s current inventory. Which requires a decision between reporting the inventory at its actual cost or it’s replacement cost. The conservatism principle applies with LCM by reporting the inventory on the balance sheet at replacement
Adjustments to Lower of Cost or Market
330-10-35-1 A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost
The inventory has a financial importance as it is purchased and recorded at its historical cost or original cost. With respect to a perpetual inventory system, inventory accounts are continually controlled as goods are purchased and placed directly into the inventory account and then later taken out when sold. Therefore the inventory is properly recognized within the period it is sold. Furthermore valuing the inventory with FIFO correctly reports the ending inventory at its market value. When ending inventory is reported at market value, before making proper year adjustments unexpected changes occur in the ordinary course of business causing the market to be lower then the cost basis of the inventory. This departure from the cost basis of pricing the inventory requires the utility of inventory is no longer as great as its original cost. The ASC allows assets to be valued with Lower of Cost or Market when evidence is proving the future utility of the inventory drops below its historical cost.
The determination of the businesses cost basis for their current inventory and determination of the market calls for ruling the LCM with the conservatism principal to resolve the issue between these two divergent amounts (original cost of inventory and the market). Justification for applying Lower of Cost Or Market is the recognition of the holding loss resulting from the market being less then the company’s current inventory. Which requires a decision between reporting the inventory at its actual cost or it’s replacement cost. The conservatism principle applies with LCM by reporting the inventory on the balance sheet at replacement