Lower Of Cost Or Market (Valuation Allowance Account, Income Statement Gains & Losses)

Описание: Accounting for inventory costing using lower of cost or market to value inventory, calculating gains and losses on write down of inventory from cost to market value, inventories are recorded at their cost, if inventory declines in value below its original cost (what ever the reason, obsolescence, price-level changes or damaged goods), write down the inventory to market to report this loss, Indirect Method (Allowance Method),does not change the cost amount, establish a separate contra-asset account, permits disclousre of inventory cost at LCM but it raises the problem of how to dispose of the balance in the Allowance account in the following period, option is to leave the account on the books and adjust the account at the next year end, with the direct method the loss is included in the cost of goods sold where as with the indirect (allowance) method the Loss is separate from COGS does not distort COGS, leaving the Allowance account on the books and adjusting the balance at the next year-end to agree with discrepancy between cost and the lower-of-cost-to-market at the balance sheet date, if prices are falling record a Loss, if prices are rising recover a Loss, recognizing a Gain/Loss has the same effect on Net Income as closing the Allowance balance to beginning Inventory or to COGS, detailed account example by Allen Mursau