Intermediated accounting
1.In general, ending inventory is stated at historical cost (what was paid to obtain it) but what if when the original cost of the ending inventory is greater than the cost of replacement? Thus the inventory has lost value. If the inventory has decreased in value below historical cost then its carrying value is reduced and reported on the balance sheet. The criterion for reporting this is the current market value. Any loss resulting from the decline in the value of inventory is charged to cost of goods sold (COGS) if non-material, or Loss on the reduction of inventory to LCM if material.
2. In the term lower of cost or market the word "market" refers to an item's current replacement cost (whether through purchase or production). The market amount is constrained or limited by two amounts: (1) an upper limit, or "ceiling," and (2) a lower limit, or "floor." An item's market amount (or replacement cost) cannot be higher than the ceiling nor lower than the floor.
Both the upper limit (the ceiling) and the lower limit (the floor) are related to the net realizable value (defined above) in the following ways:
Upper Limit or Ceiling for Market The upper limit, or ceiling, for the market amount is the net realizable value (NRV). In other words, the market amount cannot be higher than NRV. If the current replacement cost of an item in inventory is greater than NRV, the NRV is used as the market amount.
To illustrate NRV, let's assume that a company has an item in inventory that could be sold for $5. It will cost $0.80 to get the item ready for sale (by way of such costs as packaging the item), and to actually sell it (by way of such costs as sales commissions). This makes the net realizable value $4.20 (selling price of $5.00 less $0.80 of cost to complete and dispose).
Lower Limit or Floor for Market The lower limit, or floor, for the market amount is the net realizable value (NRV) minus the normal profit. In other words, the market amount cannot be lower than
2. In the term lower of cost or market the word "market" refers to an item's current replacement cost (whether through purchase or production). The market amount is constrained or limited by two amounts: (1) an upper limit, or "ceiling," and (2) a lower limit, or "floor." An item's market amount (or replacement cost) cannot be higher than the ceiling nor lower than the floor.
Both the upper limit (the ceiling) and the lower limit (the floor) are related to the net realizable value (defined above) in the following ways:
Upper Limit or Ceiling for Market The upper limit, or ceiling, for the market amount is the net realizable value (NRV). In other words, the market amount cannot be higher than NRV. If the current replacement cost of an item in inventory is greater than NRV, the NRV is used as the market amount.
To illustrate NRV, let's assume that a company has an item in inventory that could be sold for $5. It will cost $0.80 to get the item ready for sale (by way of such costs as packaging the item), and to actually sell it (by way of such costs as sales commissions). This makes the net realizable value $4.20 (selling price of $5.00 less $0.80 of cost to complete and dispose).
Lower Limit or Floor for Market The lower limit, or floor, for the market amount is the net realizable value (NRV) minus the normal profit. In other words, the market amount cannot be lower than