Working Capital, Inventory, Value Measurement

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Steel Company, a wholesaler that has been in business for two years, purchases its inventory from various suppliers. During the two years, each purchase has been at a lower price than the previous purchase. Steel uses the lower of cost or market method to value inventories. The original cost of the inventory is above replacement cost and below their net realizable value. That is, the net realizable value less the normal profit margin is below replacement cost.

Required: What do you think about the criteria used to determine which costs should be included in the inventory? Summarize the reason for the amounts Steel Company’s inventory should be reported on the balance sheet by explaining the application of lower of cost or market rule in this situation. Appraise, judge, and support why the lower of cost or market rule is used to report inventory.

· 2-3 pages

· APA

· Two peer review sources

Notes for Paper

A) Inventoriable costs include all costs incurred to get the goods ready for sale to the customer. It includes not only the purchase price of the products but also the other associated costs incurred on the inventory up to the time they are ready for sale to the customer, for example, transportation in.

B) The lower of cost or market rule is used for valuing inventories because of the concept of balance sheet conservatism and because the decline in the utility of the inventories below its cost is recognized as a loss in the current period.

C) On the balance sheet date, inventory should be reported at a market price since the value of the market price is lower than the supply. The decrease of cost or market rule is used for valuing inventories because of the concept of balance sheet conservatism and because the decline in the utility of the inventories below its cost is recognized as a loss in the current period.

D) If lower of average cost or market inventory method is used instead of the lower of FIFO cost or market inventory method, then the loss in value of inventory due to decrease in market prices will be affected in the subsequent years of income statement and the amount of inventory will be shown at a higher value than the actual realizable value in the balance sheet.