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Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition by Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

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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:

  1. What amount should appear for inventory on the company's balance sheet at December 31, 2014? Why?
  2. What amount should appear for cost of goods sold on the income statement for the year ending December 31, 2014?
  3. What is the theory behind the use of the lower of cost or market (LCM) rule?

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