ACC 333 Lecture : Gross profit.doc

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Market value means the replacement cost of the inventory. Replacement cost may be in the form of purchase cost or manufacturing cost. In other words, market value is amount that we would have to pay to acquire inventory of same quantity and quality through purchase or through manufacture. However upper and lower limits have been placed on the market value of inventory. Upper limit (also called ceiling) is the net realizable value (nrv) of inventory. Nrv equals expected selling price less the sum of expected cost of completion and expected cost needed to make the sale. Lower limit (also called floor) is net realizable value less normal profit margin on the inventory. The lcm rule can be applied to inventory on individual items basis, inventory class basis or to entire inventory. Company a owns an item of inventory having original cost of . The company expects to sell it at .

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