In Pricing Inventory, It Is Necessary to Consider Whether Replacement

question 19

Essay

In pricing inventory, it is necessary to consider whether replacement cost is lower than historical cost. When applying lower of cost or market tests, what basis should auditors use for each of the following categories of inventory:
• Raw materials
• Work-in-process
• Purchased finished goods

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Definitions:

Hedging

A strategy used to offset potential losses or gains that may be incurred by a companion investment.

Economic Exposure

The risk that a company's cash flow, foreign investments, or earnings may suffer as a result of fluctuating exchange rates.

Derivative Security

A financial instrument whose value is based on the value of an underlying asset, such as stocks, bonds, commodities, or market indexes.

American Put Option

A put option that gives the holder the right to sell an asset at a specified price anytime before the expiration date.