MGMT 120A Chapter Notes - Chapter 9: Accounting, Retained Earnings, Gross Profit
Document Summary
Part a: reporting- lower of cost and net realizable value. Gaap requires that you value inventory at the lower of cost and net realizable value. The utility a company receives from inventory results from the ultimate sale of that inventory. So deterioration, obsolescence, changes in price levels, or any situation that might compromise the inventory"s salability impairs that utility. Lower of cost or nrv avoids reporting inventory at an amount greater than the benefits it can provide. It causes losses to be recognized in the period the value of inventory declines below its cost rather than the period in which the goods are ultimately sold. Although some point out that this method then causes losses to be recognized that haven"t actually occurred. It also creates inconsistencies because decreases in value are recognized as they occur but increases are not- this is because of conservatism.
