When using FIFO for inventories, market value generally refers to
under U.S. GAAP and
under
A. historical cost; net realizable value
B. current replacement cost; historical cost
C. historical cost; current replacement cost
D. net realizable value; net realizable value
Answer (2)
Under FIFO inventories per U.S. GAAP, market value refers to the net realizable value. This means inventory is valued based on its potential selling price minus costs to sell. Therefore, the correct option is D: net realizable value; net realizable value.
;
When dealing with inventory valuation under different accounting standards, understanding what 'market value' refers to is crucial. Inventory valuation can significantly impact the financial statements of a business.
Under U.S. GAAP (Generally Accepted Accounting Principles):
For inventory measured using the FIFO (First-In, First-Out) method, market value generally refers to current replacement cost . This is a part of the 'lower of cost or market' rule used to value inventory, where 'market' can be defined as the current replacement cost, however, it should not exceed the net realizable value (NRV) or be less than NRV minus a normal profit margin.
Under IFRS (International Financial Reporting Standards):
The inventory is valued using the 'lower of cost and net realizable value' approach. Here, the market value is referred to as the net realizable value . This means it represents the estimated selling price in the ordinary course of business minus any estimated costs of completion and the estimated costs necessary to make the sale.
Thus, for the given multiple-choice question, the correct option is:
C. historical cost; current replacement cost
For IFRS, the market value refers to the net realizable value, whereas under U.S. GAAP, when using FIFO, market value aligns with the current replacement cost. Understanding these differences ensures accurate and compliant financial reporting according to the applicable accounting standards.
