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Chapter 9: Q6Q (page 474)

Question:Explain the rationale for the ceiling and floor in the lower-of-cost-or-market method of valuing inventories.

Short Answer

Expert verified

The ceiling and the floor under the method of lower-of-cost or market value helps in preventing the overstatement or understatement in the value of inventory.

Step by step solution

01

Step-by-step-solutionStep1:

The ceiling is also known as the upper limit, which is the net realizable value of the inventory, whereas the Floor is also known as the lower limit, which is the difference of net realizable value and the profit margin.

02

Step 2:

The maximum limit wherein the inventory value cannot exceed the net realizable value, helps in preventing the overstatement of inventory. In the given situation, if the replacement cost is higher than the net realizable value, then it will be not recorded at replacement cost, and the business will only be able to realize the selling price of the inventory less any disposal cost.

If the inventories are reported at replacement cost, then it will overstate the value of the inventory and will understate the loss.

03

Step 3:

The lower limit, wherein the value of cannot be below the difference between net realizable value and the profit margin. It is the minimum level that measures the price of inventory at which it can be sold and also earns a normal profit. If floor value is used, it will understate the value of the inventory, and overstate the loss.

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Most popular questions from this chapter

Kemper Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2018 at a cost of \(1,000,000. At December 31, 2017, the raw materials to be purchased have a market value of \)950,000. Prepare any necessary December 31, 2017, entry.

Question:What approaches may be employed in applying the LCNRV procedure? Which approach is normally used and why?

In some instances, accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases. Cases 1 2 3 4 5 Cost \(15.90 \)16.10 \(15.90 \)15.90 $15.90 Sales price 14.80 19.20 15.20 10.40 17.80 Estimated cost to complete 1.50 1.90 1.65 .80 1.00 Estimated cost to sell .50 .70 .55 .40 .60

Riegel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2017, consists of products D, E, F, G, H, and I. Relevant per unit data for these products appear below. Item DE F GH I Estimated selling price \(120 \)110 \(95 \)90 \(110 \)90 Cost 75 80 80 80 50 36 Cost to complete 30 30 25 35 30 30 Selling costs 10 18 10 20 10 20 Instructions Using the LCNRV rule, determine the proper unit value for balance sheet reporting purposes at December 31, 2017, for each of the inventory items above.

In its 2015 annual report, Gap Inc. reported inventory of \(1,889 million on January 31, 2015, and \)1,928 million on February 1, 2014, cost of goods sold of \(10,146 million for 2015, and net sales of \)16,435 million. Compute Gap鈥檚 inventory turnover and the average days to sell inventory for the fiscal year 2015
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