Can someone clear up how inventory is to be valued under GAAP for a firm following FIFO? From how I read it, under LIFO it is the lower of cost of market (being between net realisable value (NRV) and NRV less a profit margin), but does this apply also to non-LIFO (and retail)?
Schweser has it as “for firms using cost methods other than LIFO or retail, inventory valuation is similar to IFRS” which is lower of cost or NRV.
A question dealing with a FIFO GAAP firm on the AM B Dec 2019 mock states that “under US GAAP, market value is defined as current replacement cost”.
My intuiton is obviously to go with what CFAI state as the right answer, but I would like to know if I am misunderstanding something or does Schweser’s position actually conflict with CFAI?
Decided to post the question as well. I note that the answer specifically mentions GAAP is lower of cost and current replacement costs. Should it not be lower of cost or market, where market is defined as the range between net realisable value and NRV less profit margin?
In the case of this question, how would we know what the normal profit margin is to define the lower end of the market value (replacement cost?) interval?
The following information is available for a manufacturing company:
Cost of ending inventory computed using FIFO 4.3 Net realizable value 4.1 Current replacement cost 3.8
If the company is using International Financial Reporting Standards (IFRS) instead of US GAAP, its cost of goods sold (in millions) is most likely: A $0.3 higher. B $0.3 lower. C the same.
B is correct. Under IFRS, the inventory would be written down to its net realizable value ($4.1 million); under US GAAP, market value is defined as current replacement cost and thus would be written down to its current replacement cost ($3.8 million). The smaller write-down under IFRS will reduce the amount charged to the cost of goods sold compared with US GAAP and result in a lower cost of goods sold of $0.3 million.
Cannot answer OP’s question, but does IFRS allow inventory write-down to be treated as an increase in COGS? I always thought it would be a separate expense line item and only US GAAP allows such treatment.