Steel Company, a wholesaler that has been in business for twoyears, purchases its inventory from various suppliers. During thetwo years, each purchase has been at a lower price than theprevious purchase. Steel uses the lower of cost or market method tovalue inventories. The original cost of the inventory is abovereplacement cost and below their net realizable value. That is, thenet realizable value less the normal profit margin is belowreplacement cost.
Required: What do you think about the criteriaused to determine which costs should be included in the inventory?Summarize the reason for the amounts Steel Companyâs inventoryshould be reported on the balance sheet by explaining theapplication of lower of cost or market rule in this situation.Appraise, judge, and support why the lower of cost or market ruleis used to report inventory.
Steel Company, a wholesaler that has been in business for twoyears, purchases its inventory from various suppliers. During thetwo years, each purchase has been at a lower price than theprevious purchase. Steel uses the lower of cost or market method tovalue inventories. The original cost of the inventory is abovereplacement cost and below their net realizable value. That is, thenet realizable value less the normal profit margin is belowreplacement cost.
Required: What do you think about the criteriaused to determine which costs should be included in the inventory?Summarize the reason for the amounts Steel Companyâs inventoryshould be reported on the balance sheet by explaining theapplication of lower of cost or market rule in this situation.Appraise, judge, and support why the lower of cost or market ruleis used to report inventory.
