Question

Herman Company has 3 products in its ending inventory. Specific per unit data at the end of the year for each of the products are as follows: (lower cost or market) what is the determinant for market value & per unit inv value?

Answer 1

The 'lower of cost or market' method requires inventory to be valued at the lower of historical cost or market value, with market value determined by set rules. Per unit inventory value is calculated by taking the lower value for each unit to ensure a conservative valuation of the inventory.

Step-by-step explanation:

The student's question concerns the lower of cost or market method used in accounting to value ending inventory. The determinant for market value in this context refers to the comparison between the historical cost of inventory and the current market value. Entities must value inventory at the lower of the two when preparing financial statements.

To determine the per unit inventory value, one must compare the cost to purchase or produce the item with the market value (replacement cost, net realizable value, or net realizable value less a normal profit margin). The market value should not exceed the net realizable value, nor fall below the net realizable value minus a normal profit margin.

Per unit inventory value is then calculated by taking the lower of the cost or the determined market value for each unit of inventory. This approach results in valuing the inventory at the most conservative estimate of what it is worth, recognizing losses in value sooner rather than later.