Stiles Corporation uses the lower of cost or market rule for each of two products in...
Stiles Corporation uses the lower of cost or market rule for each of two products in its ending inventory. A profit margin of 30% on the selling price is considered normal for each product. Specific data for each product are as follows:
| product A | Product B | |
| Historical cost | $80 | $95 |
| replacement cost | $70 | $98 |
| estimated cost of disposal | $32 | $30 |
| estimated selling price | $150 | $120 |
- Assume that Stiles uses the FIFO inventory method. What is the
correct inventory value for each product?
Product A $ per unit Product B $ per unit - Assume that Stiles uses the LIFO inventory method. What is the
correct inventory value for each product?
Product A $ per unit Product B $ per unit -
For Product A, the use of a “ ” constraint prevents an excessive write-down of inventory. If the constraint were not imposed, an excessive loss would be recognized in the period of the write-down followed by an excessive profit in future periods. Therefore, the imposition of the constraint prevents the profit distortion that would occur by an understatement of inventory and overstatement of losses in the current period.
For Product B, the use of a " " constraint prevents inventory from being valued at an amount that exceeds the amount the company could realize by seliling it.
***** choices for answer 3 is ceiling, Floor, profit.
Homework Answers
IN CASE OF ANY DOUBTS FEEL FREE TO COMMENT BELOW.
1)The inventory value for each product with FIFO cost flow assumption is calculated as below:
| Product | NRV (Selling Price - Estimated Cost of Disposal) | Market Value (Selling Price - Estimated Cost of Disposal) | Cost | Inventory Value (Lower of Cost or Market) |
| A | 118 | 118 | 80 | $80 |
| B | 90 | 90 | 96 | $90 |
_____
2)The inventory value for each product with LIFO cost flow assumption is determined as below:
| Product | NRV (Selling Price - Estimated Cost of Disposal) | Replacement Cost | NRV-Normal Profit | Market Value (Mid Value of NRV, Replacement Cost and NRV - Normal Profit Margin) | Cost | Inventory Value |
| A | 118 | 70 | 73 (118 - 30%*150) | 73 | 80 | $73 |
| B | 90 | 98 | 54 (90 - 30%*120) | 90 | 96 | $90 |
_____
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