What do you think about the criteria used to determine which costs should be included in the inventory?
The criteria that is to be used in effective inventory valuation comprises of quantity of the inventory. The quantity is based on physical count, estimation or perpetual records by data recording on the units purchased and their costs, issuance of the units in production and the remnants of inventory in raw material terms. Secondly, assumption of cost flow is to be added as determinant of the criteria used. The methods added should be based on LIFO, FIFO, specific identification and average costs. Nonetheless, market fluctuations involving changes of the inventory up to the market and product costs involving purchases on either labor, freight or shipping charges are factored. In general, the costs of conversions, other costs and purchase costs less all the rebates, duty drawbacks and taxes are included.
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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.
Steel Company needs to report their inventory at the desired replacement cost since it is regarded a lesser amount. Hence, the market rule or the lower of costs is maintained. The condition arises when there is deterioration of an inventory or cases of obsoleteness and when the market prices have reduced over time. The condition is set as the replacement costs are considered as the market values. The value of the market cost is to be below the net realizable point. Hence, the inventory is entered at the given market cost as the original cost is often greater than the market cost. Nonetheless, in the balance sheet, the date is to be reported at the stipulated market cost as the market value is less than that of the inventory. The market rule or “lower of cost” is used in inventory valuation due to the conservatism of the balance sheet. Also, it is because of the utility decline of inventories occurring below the cost as recognized being a recent period’s loss. The rule is within the accounting framework.
Appraise, judge, and support why the lower of cost or market rule is used to report inventory.
“ Lower of costs or market rule” is used is because the method is found to perform objective reporting, is verifiable and realistic. Some securities and inventories holdings help in the balance sheet formulation for the short-term assets. Then again, the short term assets help in the performance of the company evaluations based on the current ratio, returns and working capital. Asset values reported by the owners are very realistic and thus a proper reflection of the recent market value is upheld. Secondly, the matching concept is welcomed by the owners as they do expense reporting. They use also the LCM method to do revenue reporting.
