Inventory

Tangible personal property of the following:

1. held for sale --> merchandise, finished goods

2. in the course of production --> work in process

3. to be consumed in the production --> raw materials

Initial measurement

Inventories are measured at cost when first recognized

Cost flow assumptions

One of the following assumptions is made to determine the cost of inventory:

1. First-in First-out (FIFO): Items that came in first are sold first

2. Last-in First-out (LIFO): Items that came in last are sold first

3. Average method: Weighted average cost is applied as unit cost

Retail inventory method is

--> allowed in some situations

Subsequent measurement

If the market is lower than the cost

--> inventory is measured at the market

--> "Lower of Cost or Market" (LCM)

Market

1. The market refers to current replacement cost

2. If net realizable value (NRV) is lower that current replacement cost

--> NRV is the market

3. If current replacement cost is lower than (1)

--> (1) is the market

(1) net realizable value - normal profit margin

Lower of Cost or Market (LCM) summary

(a) current replacement cost

(b) net realizable value

(c) net realizable value - normal profit margin

If (c) < (a) < (b) --> market = (a)

If (c) < (b) < (a) --> market = (b)

If (a) < (c) < (b) --> market = (c)