Question

1. Lawn Shop, Inc. operates retail stores in various locations across the U.S. The company sells landscaping materials, including plants and fertilizers. It currently uses the first-in first-out (FIFO) inventory method and is considering switching to another method. The following questions have arisen in regard to inventory accounting.

a. Which inventory cost flow assumptions are available to be used by the company? (Ignore any income tax issues.)

b. The company sells plants for landscaping. This inventory frequently experiences fluctuations in its market price (net realizable value) over the course of the year. Prices increase in the summer and decrease in the winter. If the company recognizes a loss due to a lower of cost or market write-down in an interim period, such as the second quarter (ended December 31), but expects the market value to increase before year end (i.e. the fourth quarter, ended June 30), is it necessary to recognize the lower of cost or market loss in the second quarter?

c. The company sells a variety of fertilizer which requires 3 months for production due to a prolonged fermentation process. If the company borrows funds to finance the production of the fertilizer, must it capitalize the interest in the cost of the inventory?

Answer 1

Solution to Q 1A

The Company can use Last-in-First-Out (LIFO) or average as other cost flow assumptions.

Solution to Q 1B

It is necessary to recognise the lower of cost or market loss in the second quarter as it will provide the stakeholders a true view into the financial health of the Company.

Solution to Q 1C

The company can capitalise the interest cost in the cost of the inventory, provided inventory satisfies the definition of 'substantial period' as per IAS 23.