Inventory write down

can someone explain below answer? why are selling costs and normal profit margin subtracted from market when reporting on Balance Sheet? iI thought its reported at lower of market or historical costs.

Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the: A. net realizable value. B. market price minus selling costs minus normal profit margin. C. net realizable value minus selling costs. Answer: B When inventory is written down to market, the replacement cost of the inventory is its market value, but the ?market value? must fall between net realizable value (NRV) and NRV less normal profit margin. NRV is the market price of the inventory less selling costs. Therefore the minimum value is the market price minus selling costs minus normal profit margin.


I think it’s because market can take on a range of values. This range is from:

[NRV minus normal profit margin] to [NRV]

And NRV = market price minus selling cost

So if you substitute NRV with the previous formula, you get the range:

[(market price minus selling cost) minus normal profit margin] to [market price minus selling costs]

You can find the material in reading #29, pg 192 in Schweser.

The replacement cost _ isn’t necessarily _ the market value; the replacement cost is the price at which the company can buy the inventory (likely a wholesale price), whereas the market value is the price at which the company can sell the inventory (likely a retail price); NRV is based on the market value, not the replacement cost. And, under US GAAP, if the replacement cost is less than NRV minus a normal profit margin, you have to use the NRV minus the normal profit margin; thus, that’s your minimum value.