[Kairos]

the answer is d)

can someone walk me through how we report this at lower of cost or market and how the replacement cost subject to a maximum ceiling relate to this?

The original cost of an inventory item is below both replacement cost and net realizable value. The net realizable value less normal profit margin is below the original cost. Under the lower of cost or market method, the inventory item should be valued at

a

Replacement cost.

b

Net realizable value.

c

Net realizable value less normal profit margin.

d

Original cost.

[Anonymous]

What it's saying is the item cost $10. Its replacement cost is $15 and its net realizable value is $18. If you're reporting this at lower of cost or market, which one do you use? Well, lower of cost or market means us the number that's lowest between those. Given that 10 is lower than 15 or 18, the answer is 10, regardless of whether you're using replacement cost or NRV for the market.

That's how I read it and would think it, but it's been awhile since I studied the terminology so this is definitely the “layman's terms” version!

[Anonymous]

To find market value, you use the MIDDLE of the ceiling (NRV), replacement cost and floor (NRV less normal profit margin).

We know that the lowest of the 3 is the floor which = NRV less normal profit margin since the problem says that the other 2 are above original cost & this one is below original cost..

We don't know which of the other 2 is the middle option (which would be market value), but we do know that whichever one it is will be above the original cost.

Therefore the lower of original cost or market = original cost.

Using the numbers from @Lilla's example above,

Ceiling (NRV) = 18

Replacement cost = 15

Floor (NRV less normal profit margin) = some number below 10 (given in the problem that it is below original cost)

So, market value would be the middle number, which is 15.

Compare market to original cost:

Market = 15

Original Cost = 10

Lower of cost or market is 10 = original cost.

I just started FAR, so I don't know much at all, but I happened to hear this on the NINJA audio on my way to work this morning!

[wombataholic]

I used a different method to memorize lower of cost or market, maybe it will work for you.

Order the following items from highest to lowest. The third one is the answer (lower of cost or market):

Cost

Replacement Cost

Net Realizable Value

Net Realizable Value – profit margin

So for your question (NRV and Replacement cost can be switched in this list, since the question doesn't mention which is greater):

Net Realizable Value

Replacement Cost

Cost

NRV- profit margin

The third item is Cost, so that's your answer. Hope this helps.

Licensed CPA
Passed each section on the first try with Ninja Notes/MCQ/Audio

[Author]

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