At the End of the First Year of a Firm's

question 160

Essay

At the end of the first year of a firm's operations,the total inventory at cost was $200 and the market value (for purposes of Lower of cost and NRV) was $220.The corresponding values at the end of years 2 and 3 are as follows: $$\begin{array} { | l | l| l | } \hline & \text { Year 2 } & \text { Year 3 } \\\hline \text { Cost } & \$ 400 & \$ 600 \\\hline \text { NRV } & 340 & 640 \\\hline\end{array}$$ Explain how,in years 2 and 3,the direct reduction and allowance methods of applying Lower of cost and NRV result in the same reported amount of income.Assume $1,000 of purchases in each year.