Q 21E-2 - Horngren'S Financial And Managerial Accounting

Question

Clarmont Resources, which uses the FIFO inventory costing method, has the following account balances at May 31, 2019, prior to releasing the financial statements for the year:

Merchandise Inventory, ending                             \( 13,500

Cost of Goods Sold                                                    68,000

Net Sales Revenue                                                   123,000

 

Clarmont has determined that the current replacement cost (current market value) of the May 31, 2019, ending merchandise inventory is \)12,400.

 

Requirements

2. What value would Clarmont report on the balance sheet at May 31, 2019, for merchandise inventory?

Step-by-Step Solution

Answer

The ending inventory would be reported at $12,400 as per lower of cost or market value criteria.

Step-by-Step-Solution Step 1: Ending inventory

Ending inventory is the part of the inventory that is left and is carried forward or the next accounting period. The ending inventory is valued against two criteria – First with the cost flow assumption and the second with the LCM rule. Both the criteria should be met to report the ending inventory.

The cost flow assumption computes the inventory at the original cost. The LCM rule tries to sync the cost with the current market cost.

Step 2: Inventory to be reported in the given case

As per the LCM criteria, the ending inventory should be reported either at the historical cost or at the market cost whichever is lower. 

 

In the given case, the lower value for ending inventory is the market value which is $12,400.

 

So, in the balance sheet, the ending inventory would be reported at $12,400.