Question

Inventory are stated at the lower of cost, computed using FIFO method, and net realizable value. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.

Write several sentences in your own words to clearly describe what this means based on the description provided above.

Answer 1

AS PER GAAP, THE MERCHANDISE INVENTORY SHOULD BE REPORTED AT LOWER OF COST OR NET REALISABLE VALUE, WHERE SUCH COST CAN BE CALCULATED AS PER THE INVENTORY METHOD ADOPTED BY THE COMPANY ( FIFO).

IN CERTAIN CASES, WHERE THE NET REALISABLE VALUE IS LOWER THAN COST, INVENTORY HAD TO BE REDUCED AND HAVE TO BE RECORDED AT SUCH LOWER NET REALISABLE VALUE.

SUCH REDUCTION IN INVENTORY COST HAS TO BE RECORDED IN EARNINGS DURING THE CURRENT PERIOD, SO AS TO MAKE THE INVENTORY APPEAR AT THE ACTUAL WORTH OF THOSE INVENTORY DURING THE CURRENT PERIOD.