U. S. GAAP vs. IFRS
International standards require inventory to be valued at the lower of cost or market, but the process is slightly different for the U.S. method of applying LCM.
The LCM assessment usually is applied to individual items, although using logical inventory categories is allowed under certain circumstances. If an inventory write-down is not longer appropriate, it must be reversed.
Under U.S. GAAP, the LCM rule can be applied to individual items, logical inventory categories, or the entire inventory. Reversals are not permitted under GAAP.
Biddle and White, LTD, prepares its financial statements according to IFRS. Item Cost NRV LCM A $ 50,000 $ 85,000 $ 50,000 B 100,000 100,000 100,000 C 80,000 65,000 65,000 D 90,000 76,000 76,000 E 95,000 86,000 86,000 Totals $415,000 $377,000 inventory write-down expense 38,000 Inventory valuation allowance ..................... 38,000
Case 4
Selling price $165 Cost of completion (10 ) Transportation cost (15 ) Ceiling (NRV) $140
Cost $110
Current Replacement Cost, $105
Ceiling (NRV) Normal profit Floor $140 (40 ) $100
Cp4 Inventories: special valuation issues
Lower of Cost or Market
The lower of cost or market rule requires that a company write down its inventory to market value when the inventory’s utility has declined.
Cost $110
Current Current Replacement Replacement Cost, $150 Cost, $150
Ceiling (NRV) Normal profit Floor $140 (40 ) $100
What is$140 Mkt. = market? LCM is the cost of $110
Deterioration, obsolescence, changes in price levels, or any situation that might change the inventory’s salability
Application of lower of cost or market method
What Mkt. =is $105 market? LCM is the market of $105
E4-1
Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:
可变现净值=预计售价-预计销售费用-预计销 售税金
Lower of Cost or Market
Determine designated Market Value
Comparison to Cost
(a) cost or (b) designated market value
Reporting the Results
IAS No. 2, states that the designated market will always be net realizable value.
U. S. GAAP vs. IFRS
International standards require inventory to be valued at the lower of cost or market, but the process is slightly different for the U.S. method of applying LCM.
Ceiling Normal profit Floor $140 (20 ) $120
What is$120 Mkt. = market? LCM is the cost of $110
Lower of Cost or Market
Try one more.
Lower of Cost or Market
Lower cost or market
designed market value Net realizable value (ceiling) Replacement cost Net realizable value-normal profit margin (floor)
Replacement cost
What unit values should Herman use for each of its products when applying the LCM rule to ending inventory? How might your solution differ if Herman Company prepares its financial statements according to International Financial Reporting Standards?
The amount it would cost to replace an asset at current prices.
Net realizable value
Net realizable value is generally equal to the selling price of the inventory goods less the selling costs
Ceiling (NRV) Normal profit Floor $140 (40 ) $100
Market $120 LCM is the cost of $110
Lower of Cost or Market
Case 2
Selling price $165 Cost of completion (10 ) Transportation cost (15 ) Ceiling (NRV) $140
$140 (40 ) $100
Lower of Cost or Market
Case 1
Selling price $165 Cost of completion (10 ) Transportation cost (15 ) Ceiling (NRV) $140
Cost $110
Current Current Replacement Replacement Cost, $120 Cost, $120
Adjusting Cost to Market
1. Record the Loss as a Separate Item in the Income Statement
Loss on write-down of inventory Inventory Or XX XX
2. Record the Loss as part of Cost of Goods Sold.
Sales $4,728 Adjusted cost of sales ($4,400 − 2,250) 2,150 Adjusted gross profit 2,578 Adjusted gross profit ratio 55%
1. Record the Loss as a Separate Item in the Income Statement
A disclosure note included in the financial statements for the first quarter of 2001 reported that during the quarter Cisco recorded “an inventory value decline of $2.25 billion classified as cost of sales.”
Lower of Cost or Market
Case 3
Selling price $165 Cost of completion (10 ) Transportation cost (15 ) Ceiling (NRV) $140
Cost $110
Current Current Replacement Replacement Cost, $75 Cost, $75