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Intermediate Financial Accounting - Inventories

1- Many companies use the lower-of-cost-or-market method to value inventory. They compare the current value of their inventory with its historical cost and adjust the value, if necessary, to ensure the inventory is booked at the lower of the two values. Why do you think inventories are valued using the lower-of-cost-or-market method? What are at least two arguments for using this method to value inventory? What are at least two arguments against using this method?

2- You are in a job interview, and your potential future employer wants to make sure that you understand accounting principles as they relate to property, plant, and equipment. What are the initial costs that will go into the balance for property, plant, and equipment? What types of additional costs would be added to this account after acquisition? What types of additional costs would be expensed directly? Do you think that there should be more exceptions for deviating from the historical cost principle as it relates to the valuation of property, plant, and equipment? Why?

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1 -Why do you think inventories are valued using the lower-of-cost-or-market method?

Companies use the lower of cost or market valuation method because the amount of the decline in any adjustment that is made between market value and cost is included in the goods that have already been sold, therefore the total gross profit is lower than if we were to use other valuation systems. Because the price is being matched in the same period, it reduces net income. This is advantageous primarily because the lower the net income, the less the company will have to pay in taxes.

What are at least two arguments for using this method to value inventory?

(A) Companies should be allowed to use the method that best suits their needs. If we're dealing with a company that has high net income, they should be permitted to use accounting methods that are in line with GAAP that result in a cost savings, including lower of cost or market.

(B) It is convenient to use this method. The determination on adjustments needed can be the result of all items in inventory valued separately, inventory as an entire group, or from various classes of inventory. Therefore, this method is adaptable based on companies that have different ...

Solution Summary

1- Many companies use the lower-of-cost-or-market method to value inventory. They compare the current value of their inventory with its historical cost and adjust the value, if necessary, to ensure the inventory is booked at the lower of the two values. Why do you think inventories are valued using the lower-of-cost-or-market method? What are at least two arguments for using this method to value inventory? What are at least two arguments against using this method?

2- You are in a job interview, and your potential future employer wants to make sure that you understand accounting principles as they relate to property, plant, and equipment. What are the initial costs that will go into the balance for property, plant, and equipment? What types of additional costs would be added to this account after acquisition? What types of additional costs would be expensed directly? Do you think that there should be more exceptions for deviating from the historical cost principle as it relates to the valuation of property, plant, and equipment? Why?

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