Accounting Case Help! Desperately!!!!?

Question

I have this accounting case due tomorrow and my group and I are really torn about the answer to this question. Under LIFO the inventory was $950,000. The company estimates under FIFO the inventory would cost $1,250,000. An appraisal value of replacement inventory says it is $1,200,00 (whereas the net realizable value of the inventory would be $1,300,000 prior to the 10% sales commission that the Company pays on all sales) The company would like to know what amount of inventory should be reflected on the company's balance sheet and whether this would have any impact on the company's other financial statements.

Answer 1

The general rule is that inventory must be stated at the lower of cost and nrv. Cost must necessarily be in line with the company's accounting policy on inventory. If the co's a/cg policy is to use FIFO, then compare the value obtained by applying FIFO with nrv, if the co's policy is to use LIFO, then compare the value obtained by applying LIFO with nrv and so on. You don't jump from one policy to another. Stay focused.

Once you've ascertained what the cost is, the next thing is to ascertain what nrv is. The true nrv is 90% of $1,300,000, or $1,170,000 since the 10% commission is identifiable to each sale.

So if your policy is to use LIFO, you compare $950,000 with $1,170,000. Since the former is the lower, your inventory would be stated at $950k.

If your policy is to use FIFO, you compare $1,250,000 with $1,170,000. Since the latter is the lower, your inventory would be stated at $1,170k.

Whatever figure is the appropriate one, that figure would be used to calculate COGS in the formula:
COGS = Opening inventory + Purchases - Ending inventory.
That figure is also the one which would appear in the balance sheet for inventory under Current Assets.

I doubt if replacement cost is an accepted cost formula as no one would bring in an appraiser for inventory every year-end.

Answer 2

GAAP requires that inventory be valued at lower of cost or market. This ties in with the conservatism principle in that if you can't get cost or above on your goods, then you need to recognize that loss in value today vs. when the inventory is sold.

The technical aspects of computing this are a little complicated to explain here, but the website below should hopefully explain things.

If you have to write down your inventory, then you have to take a charge against income, which will affect the income statement.

I hope that helped a little bit.