Chapter 5, Problem 5PSA

To determine

Inventory:

Inventory refers to the stock or goods which will be sold in the near future and thus is an asset for the company. It comprises of the raw materials which are yet to be processed, the stock which is still going through the process of production and it also includes completed products that are ready for sale. Thus inventory is the biggest and the important source of income and profit for the business.

Merchandise Inventory: Merchandise inventory is the one which is purchased from the manufacturer with the purpose to sell it to the third party. Wholesalers, retailers, or distributors are ones who indulge into purchasing the products at a lower price and selling them at a higher price so to earn profits.

Lower of cost or market: Lower of cost or market also known as LCM is an approach in which the inventory is recorded in the Balance Sheet at the cost of inventory or at the current market −the one with the lowest value.

Cost: The cost of the inventory herein means the net value incurred to get the inventory ready for sale.

Market value: Market value in the lower of cost or market approach is the cost of replacing, exchanging or substituting the inventory of the company.

To Compute: 1. Lower of cost or market for inventory applied separately to each product.
2. Record LCM adjustment entry if required.