CH 9 Inventory additional issues

CH 9 Inventory additional issues - CH 9. INVENTORIES:...

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CH 9. INVENTORIES: ADDITIONAL VALUATION ISSUES. I. Lower Of Cost Or Market (LCM). 1. Market Value. - The market value in LCM means the replacement cost constrained by the net realized value. 1) Entry Value: Replacement Cost. - The cost to replace the item by purchase or reproduction. 2) Exit Value: Net Realizable Value. - Estimated selling price less estimated disposal cost. 3) Ceiling Vs. Floor. - The 'ceiling' of market price = the net realizable value. - The 'floor' = the ceiling - normal profit margin. - Thus, the floor replacement cost the ceiling. - it is because entry values do not always respond immediately and proportionately to changes in exit values. 2. Steps. 1) Find the designated 'market value'. 2) Find the lower of historical cost or designated market value. 3) Apply LCM method a. To each item or, - The most popular because of tax requirement. - The most conservative valuation for balance sheet purpose. b. To the total of the inventory or, c. To the total of the components of each major category. d. As soon as the inventory is written down to market, the basis is considered to be the cost basis for future periods. e. A rise in the market prices of the inventory after it has been written down generally should not
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CH 9 Inventory additional issues - CH 9. INVENTORIES:...

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