price.

The valuation of the unit in the inventory at L.E 63

reduces gross profit of the past period by L.E 7 and permits

a normal gross profit of L. E27 to be realized on its sale in

the following period. If the unit had been valued at its

original cost of L.E 70, the gross profit determined for the

past year would have been L.E 7 greater. Likewise, the

gross profit for the sale of the item in the following period

would have been L.E 7 less.

To apply the lower-of-cost-or-market method, the

cost and the replacement cost can be determined for (1)

each item in the inventory, (2) major classes or categories,

or (3) the inventory as a whole. In practice, the cost and

replacement cost of each item are usually determined. To

illustrate, assume that there are 400 identical units of

Commodity A in the inventory, each acquired at a unit cost

of L.E 10.25 if at the inventory date the item would cost

L.E 10.50 so to replace, the cost price of L.E 10.25 would

be multiplied by 400 to determine the inventory value. On

Chapter Four: Inventories and the cost of goods sold

184

the other hand, if the item could be replaced at L.E 9.50 a

unit, the replacement cost of L.E 9.50 would be used for

valuation purposes. The table in Exhibit 6 illustrates one

way of organizing inventory data in applying the lower-ofcost-

or-market method to each inventory item.

Exhibit 6

Determinations of inventory at lower of cost or market.

Unit Unit· Lower of C or M

Inventory Cost Market

Commodity Quantity Price Price Cost

A 400 L.E 10.25 L.E 9.50 L.E 4100 L.E 3800

B 120 22.50 24.10 2700 2700

C 600 8.00 7.75 4800 4650

D 280 14.00 14.75 3920 3920

Total L.E 15520 L.E 15070

Although accumulating the data for total cost- is not

necessary, as shown in Exhibit 6, it provides management

with the amount of the reduction in inventory value caused

by the decline in market prices. The amount of the market

decline, L.E 450 (L.E 15520 - L.E 15070), may be reported