Fasb Research
1. You use a perpetual inventory system and value the inventory using FIFO. Prior to making adjusting year-end entries you valued the inventory at the lower-of-cost or-market. Justify why you valued the inventory at lower-of-cost or-market.
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, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market.
GAAP allows this method for determining an asset's value so that either the original cost or the current replacement cost, whichever is lowest, is used for financial reporting purposes. For example, an inventory item originally purchased for $50 that has a current market value of $30 would appear on an entity’s balance sheet at $30. The use of lower of cost or market is considered a conservative method of valuing assets.
Because inventory value may fluctuate over a period of time, due to things like theft, depreciation and because demand for a particular inventory item may not be as high as it once was, there needs to be a system that takes all of these factors into consideration. If the original value of the inventory was recorded at a greater price than it would cost to replace that item today, then the inventory would need to be shown as a loss on the balance sheet. In order to determine if an item would be recorded at historical cost or the market price, the company would take the lower of those two price points and use that to record the ending inventory. When using a FIFO method for inventory, the first items that may have been
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, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market.
GAAP allows this method for determining an asset's value so that either the original cost or the current replacement cost, whichever is lowest, is used for financial reporting purposes. For example, an inventory item originally purchased for $50 that has a current market value of $30 would appear on an entity’s balance sheet at $30. The use of lower of cost or market is considered a conservative method of valuing assets.
Because inventory value may fluctuate over a period of time, due to things like theft, depreciation and because demand for a particular inventory item may not be as high as it once was, there needs to be a system that takes all of these factors into consideration. If the original value of the inventory was recorded at a greater price than it would cost to replace that item today, then the inventory would need to be shown as a loss on the balance sheet. In order to determine if an item would be recorded at historical cost or the market price, the company would take the lower of those two price points and use that to record the ending inventory. When using a FIFO method for inventory, the first items that may have been