## FRA - US GAAP Inventory Calculation

dharde9
Good Student
Posts: 12
Joined: Fri Aug 21, 2015 4:46 am

### FRA - US GAAP Inventory Calculation

Given following information, inventory value to be reported under US GAAP and IFRS is closest to
Inv Cost = 10000/-, replacement cost = 10500, Est Selling Cost = 1000, Est Selling Price = 12000, Normal Profit margin = 10% on SP,

US GAAP// IFRS
a. \$9,800 // \$10,000 Correct
b. \$10,000 // \$10,000 Incorrect
c. \$10,000 // \$9,800 Incorrect

Answer is a, but for US GAAP replacement cost of 10500 is in price range of 11000 (NRV) and NRV - Profit margin and 9800, so we will compare 10500 with 10000 Cost and answer should be B?

edupristine
Finance Junkie
Posts: 964
Joined: Wed Apr 09, 2014 6:28 am

### Re: FRA - US GAAP Inventory Calculation

Yes. Answer wll be B i.e \$10000 // \$10000 .
Under IFRS, inventory is reported on the balance sheet at the lower of cost or net realizable value. Since original cost of \$10000 does not exceeds net realizable value i.e \$12000 - \$1000 = \$11000, inventory is reported on the balance sheet at the lower of cost i.e 10000

Under U.S. GAAP, inventory is reported at the lower of cost or market. In this case, market is equal to replacement cost of \$10500, since net realizable value of \$11000 is greater than replacement cost, and net realizable value minus a normal profit margin i.e \$11000 - \$1200 = \$9800, is less than replacement cost. Since original cost of \$10000 does not exceeds the market, inventory is reported on the balance sheet at the lower of the cost i.e \$10000