12) Explain the lower of cost or market (LCM) rule.
13) The accountants for Ruiz Imports use the lower of cost or market (LCM) method to value inventory on the balance sheet in accordance with GAAP. The accountants have gathered the following information:
Inventory cost recorded on the company’s books
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$50,000
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The company’s managers think they can sell the inventory for this amount.
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$80,000
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Replacement cost of inventory
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$45,000
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Gross profit percentage
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37.5%
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Inventory system
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Periodic
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Required:
1. Determine the amount of inventory that will be reported on the balance sheet.
2. What principle of accounting supports the lower of cost or market rule for inventory?
14) At December 31, Payless, Inc. reported inventory on the balance sheet at its cost of $200,000. However, the market value of the inventory at that date was $190,000. Put an X in the appropriate box to show the effect of continuing to report the inventory at cost:
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Overstated
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Understated
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Correct
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1.
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Current assets
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|
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2.
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Current liabilities
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|
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3.
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Net income
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15) At December 31, Payless, Inc. reported inventory on the balance sheet at its cost of $200,000. However, the market value of the inventory at that date was $190,000. Put an X in the appropriate box to show the effect of continuing to report the inventory at cost:
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Overstated
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Understated
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Correct
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1.
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Inventory
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|
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2.
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Accounts payable
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3.
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Current ratio
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