Description
Steel Company, a wholesaler that has been in business for two years, purchases its inventory from various suppliers. During the two years, each purchase has been at a lower price than the previous purchase. Steel uses the lower of cost or market method to value inventories. The original cost of the inventory is above replacement cost and below their net realizable value. That is, the net realizable value less the normal profit margin is below replacement cost.
Required: What do you think about the criteria used to determine which costs should be included in the inventory? Summarize the reason for the amounts Steel Company’s inventory should be reported on the balance sheet by explaining the application of lower of cost or market rule in this situation. Appraise, judge, and support why the lower of cost or market rule is used to report inventory.
Your well-written paper must be 2-3 pages, in addition to title and reference pages. The paper should be formatted according to APA requirements Cite at least two peer-reviewed sources, in addition to the required reading for the module.
Explanation & Answer
Attached.
Running Head: THE LOWER OF COST OR MARKET RULE –INVENTORY REPORTING 1
The Lower of Cost or Market Rule –Inventory Reporting
The Case of Steel Company
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THE LOWER OF COST OR MARKET RULE –INVENTORY REPORTING
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The lower of cost or market rule is a fundamental inventory recoding principle under the
accepted accounting principle (GAAP) which typically states that a business must record the cost
of inventory at which cost is lower which is either the original cost or its current market price. In
most cases, business is found in this situation whenever their inventory has deteriorated or has
become obsolete or a decline of the market for the inventory (Che & Sethi, 2014). It is essential
to understand that the criteria used to determine a company’s proper inventory valuation includes
market flow assumption adopted by the company, quantity of the inventory a...