Inventory Records

Question: Inventory records are maintained at the historical cost of each item. For reporting purposes, this figure

is utilized unless the market value is lower. A reduction in value can result because of a drop in replacement cost

(a purchase value) or in net realizable value (a sales value). How is the comparison of cost and market value

actually made when inventory is reported?

Assume that Rider Inc. is currently preparing financial statements and holds two bicycles in ending inventory.

Model XY-7 cost the company $260 while Model AB-9 cost $380. As mentioned, Model XY-7 now has a

replacement cost of only $210. Because of market conditions, the exact sales value is uncertain. The other unit,

Model AB-9, has been damaged and can only be sold for $400 after $50 is spent for necessary repairs. What

should Rider report for its asset inventory?

Answer: As a preliminary step in preparing financial statements, a comparison of the cost and market value of

the inventory is made. For Rider, both reported cost amounts here must be reduced and the inventory account

shown as $5601. However, the market value used for the first item is its purchase value (replacement cost of $210)

whereas the market value for the second is the item’s sales value of $350 (net realizable value of $400 minus $50).

A problem with either value can lead to the reduction of the reported asset causing the recognition of a loss.