Question

QUESTION 5. Your client, Footlocker, wants to record an entry to increase the value of its inventory of limited edition sneakers above the cost it incurred to acquire it. Footlocker justifies this decision because it knows that it will be able to sell these sneakers for a much higher price and wants its profit margin to be consistent for all its products. It also believes this method would make its balance sheet better reflect the future economic benefit it expects to receive. Is this permitted under GAAP? Explain why or not why. Quote the relevant language from the codification as well as including the relevant Codification references in XXX-YY-ZZ-** format.

Answer 1

According to GAAP, inventory should be valued at the lower of cost or market value.   Here the market value is calculated in terms of net realizable value. This net realizable value is the estimated selling price less any selling costs. Even if the estimated selling price less selling cost is coming as greater than the cost of the inventory, the inventory cannot be valued at this price. It has to be valued at the lower of cost or net realizable value. So in any case the inventory cannot be valued at a price higher than its cost. Thus Footlocker cannot record an entry to increase the value of its inventory beyond its cost as per GAAP.

It is not permitted as per U.S. GAAP, ASC 330-10