can someone help me with this? Thanks. The requirement says it has to be in memo

Question

can someone help me with this? Thanks. The requirement says it has to be in memo format and please include citation.

Valuation Issues USING CODIFICATION C8-12 Researching GAAP Situation value of these products that was taken in the Diversified Inc. is a retailer that sells a variety of goods under three major business units. Its Food Products Division delivers wholesale food products to national grocery store chains. Its Home Appliances Division manu- factures and sells home kitchen appliances such as refrigerators, microwave ovens, and dishwashers. Finally, its High Fashion Divi- sion is a recognized lcader in high-end wom- en's clothing. During his annual review of the company's financial condition, Diversi- fied's president noted that the company's inventory included a material reduction described as an "allowance to reduce inven- third quarter was more than offset by the high margins in the High Fashion Division. There- fore, the president felt that no write-down should have been taken. Further, the presi- dent noted that the company had the faulty switches in the third fiscal quarter and subsequent sales had shown that the mar- ket value of its appliances had partially recov- ered. All estimates are that the value of the appliance inventory should be completely recovered by the fourth quarter of the next fiscal year. Directions Research the related generally accepted accounting principles and prepare a short memo that addresses the president's con cerns. Cite your references and applicable paragraph numbers. tory to market." While the Home Appliances Division had received a considerable amount of negative publicity relating to fires caused by defective switches in its products, the president felt that any reduction in the market

Explanation / Answer

Ans:

According to US GAAP , Inventory to the subsequently measured at the lower of cost or market. For this purpose. market is defined as current replacement cost which is the limited to net realizable value.

However in a susequent revision in 2015 the Financial Accounting Standards Board (FASB) has amended the above definition to remove the complextites involved. Accoringly as per the revised standard Inventory should be valued at the lower cost or net realizable value. Please note the revised definition is not applicable for LIFO and retail inventory valuation method.In these two cases the old definition will still continue.

US GAAP also states that when a write down of inventory occurs a new cost basis is established and reversal of write down is prohibited.

The relevant reference for the above is ASC ( Accounting Standards codification) is 330.

Hence in the given case, since the net realizable value of the inventory of household applicances as at the Balance sheet date was less than the cost, the write down of inventory to market is appropriate. The fact that the margin from the High Fashion division more than off set the reduction in market value of kitchen appliances inventory susequently is irrelevant

Also, as per ASC 330, a write down of inventory cannot be reversed susequently eventhough the market price may have recovered.

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