EXERCISE 6-4
| Purpose: | (L.O. 4) This exercise will review the lower of cost or market rule for inventory valuation. |
Electronics Galore had net cost of purchases of $5,000,000 and net sales revenue of $7,200,000 for 2014, its first year of operations. The following information pertains to its inventory at December 31, 2014:
| Historical cost (using FIFO) | $420,000 |
| Current replacement cost | $340,000 |
Instructions
Answer the following questions:
- What amount should appear for inventory on the company's balance sheet at December 31, 2014? Why?
- What amount should appear for cost of goods sold on the income statement for the year ending December 31, 2014?
- What is the theory behind the use of the lower of cost or market (LCM) rule?
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