Question

A company accounts for its inventory using the first-in, first-out (FIFO) method. The following information pertains to the inventory at the end of the fiscal year:

Historical cost $150,000
Current replacement cost 120,000
Net realizable value (NRV) 125,000
Normal profit margin 15,000
Fair value 140,000

What amount should the company report as inventory on its year-end balance sheet?

Answer 1

Answer:

$125,000

Explanation:

Inventory is initially recognized at cost which includes the purchase price and all cost elements directly attributable to getting the inventory item to it's place of use.

However inventory is subsequently carried at the lower of cost or net realizable value.

In light of this and the information given, Historical cost $150,000 while Net realizable value (NRV) 125,000. Since the Net realizable value (NRV) 125,000 is lower than the Historical cost $150,000 , inventory is recognized at the NRV of $125,000.