Question

To:	April Strauss, Accounting Manager
From:	Mike Francis, CEO
Date:	January 12, Year 11
Re:	Assignment

April,

The rest of the board and I are trying to determine if our current inventory cost flow method is the most efficient and effective method to achieve our objectives. Unfortunately, we are all too busy to do the necessary work to make the determination. That is why we need your help. To help determine the appropriate costing method, I have laid out six separate scenarios. I will need you to consider each scenario independently, and then determine the appropriate measure of the inventory in our year-end financial statements. Unless stated otherwise, Abi prepares its financial statements under U.S. GAAP.

Let me know if you have any problems.

Sincerely,

Mike

Newspaper Profile of Abi CompanyClose

Featured Company of the Week: Abi Company

Key members:	Mike Francis, CEO; Judy Schmidt, CFO; Lonnie Reitz, COO
Established:	January, Year 1, Fort Myers, FL
Industry:	Hobbies/Games
Mission statement:	To make even the smallest pawn feel like a king.
Key highlights:	Abi Company is a public company that manufactures and sells chessboards.
Key stats:	Over 1,000,000 chessboards sold since inception and 5-time winner of best chessboard design in Florida

Inventory for Abi CompanyClose

Abi's inventory at its fiscal year end on December 31, Year 10.

Estimated selling price	$120,000
Current replacement cost	100,000
Normal profit margin	15,000

NOTE: This inventory was purchased on June 30, 2016, for $108,000 and the inventory was not sold by the end of the year.

Scroll down to complete all parts of this task.

Use the exhibits to determine the appropriate measure of the inventory in the company's year-end financial statements for each of the independent situations described below.

Select from the option list provided the correct choice. Each choice may be used once, more than once, or not at all.

Situation	Answer
1. Abi accounts for its inventory using the moving-average cost method. The estimated costs of completion and disposal of inventory are $10,000.
2. Abi accounts for its inventory using the FIFO cost method. The estimated costs of completion and disposal of inventory are $15,000.
3. Abi accounts for its inventory using the LIFO cost method. The estimated costs of completion and disposal of inventory are $10,000.
4. Abi prepares its financial statements under IFRS and accounts for its inventory using the FIFO cost method. The estimated costs of completion and disposal of inventory are $10,000.
5. Abi accounts for its inventory using the LIFO cost method. The estimated costs of completion and disposal of inventory are $3,000.
6. Abi accounts for its inventory using the FIFO cost method. In its third-quarter interim financial statements, Abi recognized a loss on inventory write-down of $12,000. This inventory was reported at $96,000. The estimated costs of completion and disposal of inventory are $10,000.

The options are

Current replacement cost

Estimated selling price

Historical cost

Net realizable value

Net realizable value minus the normal profit margin

Answer 1

Answer
Introduction
As per GAAP provisions, Inventory shall be carried at cost or net realizable value, whichever is lower.
Where;
Net realizable value = Selling price - dispoal costs
Inventory carrying is done using this rule, irrespective of the method valuation that an entity uses i.e. FIFO/LIFO etc
Situation 1
Cost	100,000
Net realizable value (120,000-10,000)	110,000
Option	Current replacement cost
Reason	Replacement cost is lower than Net realizable value
Situation 2
Cost	100,000
Net realizable value (120,000-15,000)	105,000
Option	Current replacement cost
Reason	Replacement cost is lower than Net realizable value
Situation 3
Cost	100,000
Net realizable value (120,000-10,000)	110,000
Option	Current replacement cost
Reason	Replacement cost is lower than Net realizable value
Situation 4
Cost	100,000
Net realizable value (120,000-10,000)	110,000
Option	Current replacement cost
Reason	Replacement cost is lower than Net realizable value
Situation 5
Cost	100,000
Net realizable value (120,000-3,000)	117,000
Option	Current replacement cost
Reason	Replacement cost is lower than Net realizable value
Situation 5
Cost	100,000
Net realizable value (96,000-10,000)	86,000
Option	Net Realizable value
Reason	Net realizable value is lower than Replacement cost.