2014 FASB Update Intermediate Accounting (15th Edition) Edit editionThis problem has been solved:Solutions for Chapter 9
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Inventory Cost:
Inventory cost is the price paid for the inventory plus any other costs that are incurred to bring the product into saleable condition. Inventory costs include all those costs that are can be directly attributed to obtaining the products or getting the products ready for sale. Costs that do not meet the set criteria are not included in inventory costs.
Inventory valuation:
Accounting:
a.
The following table shows the dollar amount of the inventory:
| Particulars | Commercial pumps | Residential pumps |
| Value of the inventory: | ||
| (200 × 475) | 95,000 | |
| (300 × 500) | 150,000 | |
| (500 × 1,000) | 500,000 | |
| Value of the inventory | 245,000 | 500,000 |
Therefore, the value of the inventory for commercial pumps and residential pumps is $245,000 and $500,000 respectively.
b.
In case, the company applies the major category level, then the closing inventory would be calculated as follows:
| Particulars | Commercial pumps | Residential pumps |
| Value of the inventory: | ||
| (500 × 500) | 250,000 | |
| (500 × 1,000) | 500,000 | |
| Value of the inventory | 250,000 | 500,000 |
Therefore, the value of the inventory of commercial pumps and residential pumps is $250,000 and $500,000 respectively.
Analysis:
The first approach is better as it results in better presentation of the valuation of the inventory figures.
Principles:
a.
The following table shows the description of the value the inventory when it is placed:
| Units | Cost in $ | Designated market value in $ | Valuation in $ |
| 200 | 475 | 1,050 | 475 |
| 300 | 500 | 500 |
Therefore, the inventory value is $1,050.
b.
The rule of valuing the inventory at the lower of the cost or the market value, values the inventory in the balance sheet conservatively, but its effect on the income statement may or may not be conservative.
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