Prior to 2015, most inventories were valued at the “lower of cost or market.” Specifically, there was a two-step process

[answerhappygod]

Prior to 2015, most inventories were valued at the “lower ofcost or market.” Specifically, there was a two-step process todetermine whether inventory needed to be written down. First, afirm had to determine “market” (based on the ordering ofreplacement cost, net realizable value and net realizable valueless a normal profit margin) and then the firm determined whethercarrying value exceeded this determined market value. In 2015, theFASB simplified the rules (for firms other than those using LIFO orthe retail inventory method) and firms compare cost directly to netrealizable value.
Definition: Net realizable value isthe estimated selling price in the ordinary course ofbusiness, less reasonably predictable costs of completion,disposal, and transportation.
a. Do you think it is reasonable to depart fromhistorical cost when valuing inventory? Why? (Use arguments basedon the conceptual framework to support your response).
b. The justification for the update was:
The Board is issuing this Update as part of itsSimplification Initiative. The objective of the SimplificationInitiative is to identify, evaluate, and improve areas of generallyaccepted accounting principles (GAAP) for which cost and complexitycan be reduced while maintaining or improving the usefulness of theinformation provided to users of financialstatements.
Provide an example of a simplification in inventoryvaluation that would REDUCE the usefulness of the informationprovided for users. Be specific. Describe how you would measure thevalue of the inventory, how it is simpler than the existing method,and why it is not useful.
c. How would you determinewhether a simplified standard maintains or improves the usefulnessof the information?