Question

Please explain the lower-of-cost-or-market rule to merchandise inventory

Answer 1

As per IAS 2, Inventories are required to be valued at "lower of Cost or Market Value" Where, Cost Means - Cost Should Include- (a) Purchase cost Including taxes, transport and handling charges (b) conversion cost (c.) Costs incurred to bring inventory to present location and condition Where As, NRV means Net Realisable value NRV = Selling price - Cost to Sell

Example : Product Cost A 190.00 230.00 170.00 150.00 100.00 Selling price(A) $ 210.00 $ 250.00 $ 230.00 $ 240.00 $ 130.00 According to IAS 2, Ending inventory Should be Valued at Lower of Cost or NRV Each Product Should be Valued separately at lower of cost or nrv NRV = Selling price - Cost to sell Computation of NRV Product A Selling price(A) Sales Commission(B) Shipping costs(C.) 210.00 $ 21.00 $ 250.00 $ 25.00 $ 230.00 $ 23.00 $ 240.00 24.00 $ 130.00 $ 13.00 $ httी C NRV=(A-B-C) $ 170.00 $ 202.00 $ 190.00 $ 201.00 $ 107.00 19.00 23.00 17.00 15.00 10.00 Solution : Product Cost 190.00 230.00 170.00 150.00 100.00 NRV $ $ $ $ $ 170.00 202.00 190.00 201.00 107.00 Per Unit Inventory Value $ 170.00 $ 202.00 $ 170.00 150.00 $ 100.00 D $
*Market Value Interchangeably Used as NRV in IAS 2