Question

PLEASE explain how to get the answer too.

Inventory Write-Down

The following information for Tuell Company is available:

	Case
	1	2	3	4	5
Cost	$5.00	$5.00	$5.00	$5.00	$5.00
Net realizable value	5.10	5.50	4.90	4.20	4.70
Net realizable value less normal profit	4.80	5.30	4.80	4.00	4.60
Replacement cost	5.30	5.20	4.60	4.15	4.80

Required:

1.	Assume Tuell uses the LIFO cost flow assumption. What is the correct inventory value in each of the preceding situations under U.S. GAAP? If required, round your answers to the nearest cent.

Case		Inventory value
1		$
2		$
3		$
4		$
5		$

2.	Assume Tuell uses the average cost inventory cost flow assumption. What is the correct inventory value in each of the preceding situations under U.S. GAAP? If required, round your answers to the nearest cent.

Case		Inventory value
1		$
2		$
3		$
4		$
5		$

3.	Assume that Tuell uses the average cost inventory cost flow assumption. What is the correct inventory value in each of the preceding situations if Tuell uses IFRS? If required, round your answers to the nearest cent.

Case		Inventory value
1		$
2		$
3		$
4		$
5		$

Answer 1

SOLUTION:

Important point to understand

In US GAAP, LIFO method use Lower Of Cost Or Market  and all other than LIFO use Lower Of Cost Or NRV, but in IFRS all method use Lower Of Cost Or NRV. The difference between IFRS and GAAP is that gaap doesnt allow write up where as IFRS allows to do so.

1.

For inventory valued using LIFO,the inventory should be measured at the lower of cost or market .For find inventory value we have to find the middle value(here the middle value is the market value).

For example in case 1 :

NRV =5.10

Replcmnt Cost =5.30

NRV less Normal Profit=4.80

So the market value is 5.10 because in the range between 4.80 to 5.30,the middle value is 5.10.The market value have be then compared with cost.If the cost is less than the market value then inventory value is the cost and vice versa..so here cost is less than market value.hence inventory value is 5.

this is the simplest way to calculate inventory value under LIFO.

CASE	cost	Nrv	Replcmnt Cost	NRV less normal profit	Market Value	Inventory Value
1	5	5.10	5.30	4.80	5.10	5
2	5	5.50	5.20	5.30	5.30	5
3	5	4.90	4.60	4.80	4.80	4.80
4	5	4.20	4.15	4.00	4.15	4.15
5	5	4.70	4.80	4.60	4.70	4.70

2.

Inventories measuring using any method other than LIFO are measured at the lower of cost or NRV. Net Realizable Value is calculated as selling price minus the cost to complete and dispose.

For example in case 1 :

COST = 5

NRV = 5.10

Here in order to find the value of inventory we should only compare the cost with nrv and if the cost is below nrv then th cost is the value of inventory and vice versa..

CASE	COST	NRV	INVENTORY VALUE
1	5	5.10	5
2	5	5.50	5
3	5	4.90	4.90
4	5	4.20	4.20
5	5	4.70	4.70

3.

Under IFRS all inventory is valued at the lower of cost or NRV. so the inventory value will be same as if under US GAAP,but the only difference is that the us gaap doesnt allow to write up the inventory value whereas in IFRS it allows to write up.

CASE	COST	NRV	INVENTORY VALUE
1	5	5.10	5
2	5	5.50	5
3	5	4.90	4.90
4	5	4.20	4.20
5	5	4.70	4.70