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

question 32

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.

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Definitions:

Goodwill

An intangible asset representing the value of a company’s brand name, solid customer base, good customer relations, and employee morale.

Amortize

To amortize means to gradually reduce or write off the cost or value of an asset or a debt over a period.

Fair Value

The estimated market value of an asset or liability, reflecting the amount for which it could be exchanged in an orderly transaction between market participants.

Net Assets

Net Assets represent the total assets of a company minus its total liabilities, showing the company's financial health and equity value.