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Please can someone answer this for me!!!!!!!!!!!!!!!!!! GAAP requires a Lower-of-Cost-or-Market as a conservative approach to...

Please can someone answer this for me!!!!!!!!!!!!!!!!!!

GAAP requires a Lower-of-Cost-or-Market as a conservative approach to the Balance Sheet reporting of Inventory. The textbook defines this as a limitation, due to the departure of the cost principle in favor of the fair market value approach. How is this impacted by recent fluctuations in various market prices (hint: oil???) and how would you advise to report inventory values during such times?

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Answer #1

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Let's take an example in which cost of oil per barrel price is USD 50 and market price for the same is become negative. In that case Inventory is valued at cost and reaming difference between cost and current negative price per barrel will booked under provision under current liability.

Cost of 1 barrel of oil = 50 USD

Market price of 1 barrel of oil = -1 USD.

In balance sheet: Inventory will be reported at USD 50 and provision under current liability will be created for USD 51.

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