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A company uses the cost-of-goods-sold method of reporting lower-of-cost-to-market adjustments to inventory. The company reports the...

A company uses the cost-of-goods-sold method of reporting lower-of-cost-to-market adjustments to inventory. The company reports the following balances for the first half of the fiscal year:

Month Inventory at cost Inventory at market
January $78,000 $76,000
February $92,000 $89,000
March $66,000 $72,000
April $102,000 $100,000
May $74,000 $69,000
June $97,000 $92,000

  
Which effect does the adjustment of inventory value to market have on the year-to-date cost of goods sold?  

The answer is $5,000 increase, but I am wondering how they got it. Please show work.

Business   Accounting   
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Homework Answers

Answer #1
  • The Inventory balance should match the balance equal to the ‘COST’ or “Market Value” which ever is less.
  • The question gives ending inventory at cost and market for each month. For the year end of period end, the last month is June. In june Cost if $ 97000 while market price is $ 92000, Hence, applying the same principal, Inventory should be value at $ 92000 which means it has to be decreased by $ 5000 [97000 -92000]. Inventory will be credited by $ 5000. Cost of Goods Sold will hence, increase by $ 5000 due to this when it will be debited for adjustments.
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