Question

Lower of Cost or Market

Stiles Corporation uses the lower of cost or market rule for each of two products in its ending inventory. A profit margin of 30% on the selling price is considered normal for each product. Specific data for each product are as follows:

	Product A	Product B
Historical cost	$80	$96
Replacement cost	70	98
Estimated cost of disposal	32	30
Estimated selling price	150	120

Required:

1. Assume that Stiles uses the FIFO inventory method. What is the correct inventory value for each product?

   Product A	$   per unit
   Product B	$   per unit

2. Assume that Stiles uses the LIFO inventory method. What is the correct inventory value for each product?

   Product A	$   per unit
   Product B	$   per unit

3. Fill in the blanks using either celling, floor or profit(only choose one)

   For Product A, the use of a ______________________ constraint prevents an excessive write-down of inventory. If the ______________constraint were not imposed, an excessive loss would be recognized in the period of the write-down followed by an excessive profit in future periods. Therefore, the imposition of the _______________constraint prevents the profit distortion that would occur by an understatement of inventory and overstatement of losses in the current period.

4. For Product B, the use of a " __________________" constraint prevents inventory from being valued at an amount that exceeds the amount the company could realize by seliling it.

Answer 1