Lower of Cost or Market Rule for Valuing Inventory
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- Опубликовано: 26 янв 2025
- This video shows how to apply the lower-of-cost-or-market rule to value inventory. A comprehensive example is presented to illustrate how the original cost of the inventory is compared to its "market" value (the middle value of replacement cost, net realizable value, and net realizable value minus the normal profit) to determine whether an inventory writedown is necessary. The video then demonstrates how to record the appropriate writedown with a journal entry.
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Probably a late comment as this video is 8 years old, but you have no idea how much you have helped me understand these concepts with ease. You have become my #1 resource for when I get hung up on an accounting lesson.
My professor wasted 2 lectures on this, and still no one got it. You explained it in 6 mins and I understood it. You are a real G my friend.
Facts lol
These videos save me so much time and sanity. I want to understand, but my lecture material wasn't doing to trick. I understand now. Bless you!
Happy to help!
Man, you're going to get me through college. You explained this way better than my professor did.
I love, love, love your videos.... They are priceless! Why in the world my accounting professors ramble on like idiots and fail to explain the concepts as clear as you do??? Thanks a TON!!!!
+Vic R. Thank you for the kind words, and for bringing a smile to my face :) I'm glad you found the videos useful, and I hope you do excellent in your courses and career!
lol isn't that the truth, I had one professor in intermediate I, that I thought wanted to confuse me...and he did lol. Accounting procedure needs a clear, and thoughtful explination, which is why I always search for these videos. Top shelf!
because your accounting professor is not talented and a good talker
Usually because those professors are full of themselves and don't feel the need to get on the students level to help them comprehend things, they just expect you to "get it"
Future realizable value of inventory! Love concepts like this
Gosh...Higher Education is such a scam. I've learned more about accounting from folks sharing on RUclips than all six accounting "professors" I've had in the last year.
honestly, having a phd doesn't mean that they're good professors. some people just cannot teach
Thank you so much, I've been studying for the CMA and this is by far the easiest explanation of this rule I've encountered.
These conceptual videos are amazing to watch before lectures
Perfect! I'm glad they're working for you. Best of luck in your studies!
My goodness! Your explanations are so clear and simple! THANK YOU!
I wish my accounting courses were based on your videos. You have such a clear and simple way of explaining concepts. You, sir, are a gem!
Wow, thanks!
Oh gosh, thank you. I had cost as the lower of historical cost or market value compared to market in the same way you explained it, and kept getting my accounting homework wrong. Your video cleared up the mud my textbook made of this.
I'm glad it worked out! Textbooks can be so confusing sometimes...
Superb explaination. The example helps understand it easily.
😀
Thank you this actually helped me understand. Straight to the point and at a good pace
Thank you so much for making this concept so simple, my CFA book made it sound so complicated. Kudos and keep up the good work.
This is the best explanation so far. Thank you very much.
awesome explanation. Seriously it wasnt clicking until now.
Wonderful video... concise, explained the topic, well organized and spoken.
Sir, you are great teacher! I can't thank you enough for helping me to pass all my accounting courses. Whenever I get confused in class I don't mind c'z I know well that after watching your videos I'll understand all what I learnt, thanks a lot Sir!!!! ❤️❤️
thank you so much! got tons of help just before my accounting exam :)
Thank you SO MUCH for your awesome videos! You made the material so easy to understand! THANKS A LOT!!!
I'm glad you like the videos! Take Care.
You have made this so simple. Thank you so much.
Omg, I wish my professor could teach like this. I get it now!!!
I have been practicing for my CPA exam and these videos are very helpful. I was wondering do you have videos on AR with and without recourse?
I love your videos they’re very much helpful. I still need little more practice and understanding but these videos are perfect!
This always confused me. I get it now!!! Thank you soooo much!!!!!
Great explanation!! Really love all your videos. Thank you so so much!
Good video. This is much more helpful than what I get in the class I'm paying $1500 for ... -- Can someone explain NRV Less normal profit? The terminology is confusing to me. It is supposed to be a value with some minimal profit made if sold, right? But the NRV Less Normal Profit is lower than the replacement cost ... so there is no profit, right? It would seem to me if you're calculating a minimum profit, it should be done by adding a % to your replacement cost. Not subtracting an amount from a sale price. It's really throwing me off.
thank you very much for your video but pleas explain cases when cost is greeter than mark like this exercise and
________________________________________________________
the original cost of an inventory item is above the
replacement
cost and the net realizable value. The replacement
cost is below the net realizable value less the normal profit
margin. As a result, under the lower of cost or market method,
the inventory item should be reported at the
Great concept sir ...............
@Edspira can you please confirm if the entry to write-down inventory is done using the indirect method? I believe you would directly credit COGS under the direct method? Thank you!
Thank you for the explanation. Do you have a case where market value > original cost? Since inventory cannot be written up according to GAAP than balance in inventories will stay the same without any adjustments? Thanks
Thank you great explanation.
So whats the difference between the loss from decline in inventory value and the accumulated depreciation?
Only assets are depreciated. This is specifically dealing with inventory that will be used to generate company sales.
Amazing video as always, but I have one thing that’s not clear to me- the inventory credit is going down to the balance sheet, in order for it to balance do you credit the inventory and debit expenses?
Oh dear I do not understand myself what I’m talking about, basically if you credit assets on the balance sheet, how do balance the accounting equation?
You would debit "loss from decline in inventory value" and you would credit "inventory". Inventory is an asset, so assets would decrease with a credit. The loss account is a temporary account that reduces net income. A reduction in net income will reduce retained earnings at the end of the period. (which is a stockholder's equity account). Great question!
What happens if the replacement cost and inventory cost are flippped?
what if the cost is the lower than market value, how do you record it then?
I do have a question. We know assets = liability + equity. So if we are making the following journal entry
Loss from decline in inventory value $25
Inventory $25
The asset account is lowered. Shouldn't there be a corresponding entry to lower equity too?
Loss is a Stockholders Equity account
what if there is no profit margin, while ncv and replacement cost are present
Thank you for your video - I found it quite useful. Just to clarify, is this method (with a price ceiling and a price floor) only accepted under US GAAP for amounts reported on the BS correct? Under IFRS are you only concerned with calculating NRV and comparing that to cost - choosing the lower of the two?
How did you get 75 as the market value if 82 was in the middle
Nice...
Respect from India☺👍
Fist bump from St. Louis, USA 👊 Thanks for watching!
Simple and accurate 👍🏻👏🏻
God bless you for this.
Thank you my friend. Good tidings to you as well!
Thanks man
Amazing
THANK YOU :)
I love you!
Who the hell makes this crap up? This is the worst class to take. Why am I having to take this? I hate this course. Here is how you learn accounting. You are either making money or you are not making money. The end.