William Co. follows the practice of valuing its inventory at the lower-of-cost-or-market. The following information is available from the company’s inventory records as of December 31, 2017. Item   Quantity   Unit Cost   Replacement Cost/Unit   Estimated Selling Price/Unit   Completion & Disposal Cost/Unit   Normal Profit Margin/Unit A   1,800   $9.15   $10.25     $12.81     $1.83     $2.20   B   1,500   10.00   9.64     11.47     1.10     1.46   C   1,700   6.83   6.59     8.78     1.40     0.73   D   1,700   4.64   5.12     7.69     0.98     1.83   E   2,100   7.81   7.69     8.17     0.85     1.22   Jane Doe is an accounting clerk in the accounting department of William Co., and she cannot understand why the market value keeps changing from replacement cost to net realizable value to something that she cannot even figure out. Jane is very confused, and she is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant. 1. Calculate the lower-of-cost-or-market using the individual-item approach. 2. How much will Jane need to write down the entry by?

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.