Inventory Costing: A Comprehensive Case Study
Peter J Harris, Umapathy Ananthanarayanan · RePEc: Research Papers in Economics · 2019
Under Accounting Standards Update (ASU) 330, Inventory requires an entity to measure inventory at lower of cost or market. Market value can be determined in three methods: replacement cost, net realizable value or net realizable value less profit margin. The Federal Accounting Standards Board (FASB) received comments from users that the current guidance on the measurement of inventory is unnecessarily complex because there are three potential outcomes to determine market. In response to these concerns, FASB issued ASU 2015-11 to simplify the measurement of inventory as part of the FASB’s Simplification initiative. In this paper, we outline the new mechanism proposed by FASB for measuring inventory and how it would impact entity’s financial statements. We provide a series of comprehensive questions relating to Lower of Cost and Net Realizable Value, and Lower of Cost or Market at the end of the paper. This case study is best suited for the Intermediate Accounting 1 course