In short
Inventory measured using last-in, first-out (LIFO) or the retail inventory method is reported at the lower of cost or market. Market is replacement cost, but no higher than net realizable value (the ceiling) and no lower than net realizable value minus a normal profit margin (the floor).
Key takeaways
- All other inventory methods use the simpler lower of cost and net realizable value.
- Market is the middle value of replacement cost, the ceiling and the floor.
- Write-downs aren't reversed if prices later recover within the year-end measurement.
Example
Cost $50, replacement cost $42, net realizable value $48, normal profit $8 (floor $40): market is $42, so inventory is written down to $42.
Where it's tested
FAR: Inventory — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Inventory has a cost of $80 per unit. Selling price is $100, disposal costs are $15, and normal profit margin is $10. Replacement cost is $70. Under the lower-of-cost-or-market rule (LIFO/retail inventory), what is the inventory's reported value per unit?