Kieso, Intermediate Accounting, 16e Helo I System Announcements CALCULATOR PRINT
ID: 2438471 • Letter: K
Question
Kieso, Intermediate Accounting, 16e Helo I System Announcements CALCULATOR PRINTER VERSION BACK NEXT CPA Question 02 The original cost of an inventory item is above the replacement cost. The inventory item's replacement cost is above the net realizable value. Under the lower of cost or market method, the inventory item should be valued at O Replacement cost. O Net realizable value. (e) Net realizable value LESS normal profit margin. Original cost. Click if you would like to Show Work for this question: Open Show Work Question Attempts: 0 of 1 used SAVE FOR LATER SUBMIT ANSWERExplanation / Answer
Solution: The correct option is 3rd i.e Net Realisable value Less normal Profit margin
Explanation: The inventory should be valued at lower of cost or market value.The cost of the inventory is the cost of purchasing the inventory.For calculation of the cost of the inventory either LIFO, FIFO or Average Cost Method is used. Market Value of the inventory would mean the Replacement Cost of the Inventory , the Net Realisable Value etc. To understand we use an example: Suppose the cost of inventory for the organization is $ 20 and later on the supplier of the inventory reduces the price to 15 $ then the replacement cost becomes 15 $ as to buy more of the same inventory the organization has to spend 15$. Now the organization will sell its inventory that it has purchased and given that the net realizable value is lower than the replacement cost and when the organization sells the inventory there will be a profit margin expected to be realized from the inventory. So the Net Realisable Value less the Normal Profit margin would be less than Replacement cost.Therefore when we need to value at lower of cost or market(net replacement/net realizable value/net realizable value less normal profit margin).
In Effect the lowest being Net Realisable Value less normal profit margin, The inventory is valued at Net Realisable Value less normal profit margin.
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