Inventory Valuation

• What is Inventory Valuation?

  Determining the cost of inventory
• What is the purpose of Inventory Valuation?

  To fairly represent the monetary worth of goods
• What is Historical Cost in inventory context?

  Original purchase price of the inventory
• What does Inventory refer to?

  Goods held for sale in business
• What is a Balance Sheet?

  Financial statement showing assets, liabilities, equity
• How would you value shirts bought for $10 each?

  Value them at $10 per unit
• What does LCNRV stand for?

  Lower of Cost or Net Realizable Value
• What is the definition of Cost in LCNRV?

  What you originally paid for it
• What is Net Realizable Value (NRV)?

  Estimated selling price minus costs to sell
• If a toy costs $10 but sells for $5, what is its value?

  It's worth $5 now
• What steps are involved in determining inventory balance using LCNRV?

  Determine cost, calculate NRV, compare values
• What should you do if Cost is greater than NRV?

  Reduce inventory to its NRV value
• What is a journal entry in inventory valuation?

  Record adjustments to inventory value
• What is the COGS Method?

  Debits Cost of Goods Sold, credits Inventory
• What is the Loss Method?

  Debits Loss Due to Market Decline
• What does the Conceptual Framework provide for inventory valuation?

  Guidelines for financial reporting
• What does Relevance mean in the Conceptual Framework?

  Information impacts decision-making
• What is Faithful Representation?

  Accurate and unbiased portrayal of inventory
• What does Comparability allow in inventory valuation?

  Comparison of inventory values across periods
• What is Verifiability in the context of inventory valuation?

  Confirming inventory valuations are objectively determined
• What does Understandability mean in the Conceptual Framework?

  Inventory information is presented clearly
• What is Market Value in inventory context?

  Current replacement cost of inventory
• What is the Lower of Cost or Market (LCM) method?

  Valuing inventory at lower of cost or market value
• What is the Ceiling in market value?

  Net realizable value prevents overstatement
• What is the Floor in market value?

  NRV less normal profit margin prevents understatement
• How do you determine market value using LCM?

  Compare market value to historical cost
• What are some criticisms of the LCM method?

  Asymmetry, inconsistent valuation, subjectivity
• What does Asymmetry in LCM refer to?

  Allows decreases but prevents increases in value
• What does Inconsistent Valuation mean in LCM?

  Different valuations each year despite stable market
• What is Delayed Income in LCM?

  Loss recognized may inflate future income
• What does Subjectivity in LCM lead to?

  Inconsistent or inaccurate inventory valuations