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Inventory and Fixed Assest - Essay Example
Finance & Accounting
Pages 4 (1004 words)
There are different accounting rules that affect the treatment of economic transactions. These special rules must be part of the knowledge base of a professional accountant. This paper discusses four special accounting rules for specific events. The four accounting concepts discussed in this paper are lower cost or market, capitalization of interest in construction projects, recording gain or loss on asset disposal, and adjusting goodwill for impairment…
Inventory is categorized as a current asset in the balance sheet. Most manufacturing companies have large amounts of inventory. That inventory can go down in value for various reasons including technological advances. “Accounting Research Bulletin No. 43 (ARB No. 43) leads to an accounting valuation method known as the lower of cost or market, or LCM” (Accountingcoach, 2011). Based on ARB No. 43 the word market refers to the current replacement cost of the item. A concept related to the calculation of lower of cost or market is net realizable value (NRV). The net realizable value is defined as the expected price minus the cost for completion and disposal. Another variable that must be considered in LCM calculations are the lower ceiling and upper ceiling. The upper ceiling is the same amount as the NRV, while the lower ceiling is calculated by subtracting normal profit from NRV. The accounting for lower cost or market requires specific journal entries to record LCM. The two ledger accounts used by accountants are: Allowance to Reduce Inventory to LCM Loss from Reducing Inventory to LCM Take for example a company that had an inventory with a cost of $70,000 and market value of $68,000. ...
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