1,484
19
Essay, 2 pages (350 words)

Incentory valuation

Inventory Valuation Palermo Wine Company The Chief Financial Officer 1st June The Auditors Dear Sirs, Re: Inventory Valuation This letter serves to justify the position of Palermo Wine Company to maintain the value of its inventory in its account at 31st May 2010. On that date, approximately one third (1/3rd) of the company’s inventory, which consisted of 2, 100 cases of Red Wines from Bordeaux, with an average cost of $120 per case had a market value of $146, down from the previous price of $220. Since that time the replacement cost of wine has fallen to $80 per case. According to generally accepted accounting principles (GAAPs) there are three acceptable methods of valuation. These include average cost (AVCO) and First-in-first-out (FIFO) and last-in-first-out (LIFO). However, International Accounting Standards (IAS) 2 does not permit the use of LIFO (BPP 2009, p. 205). The method that we have adopted is AVCO. GAAPs and IAS 2 also require that inventory be valued at the lower-of-cost-and-market value (LCM) (Hoyle and Skender 2010). This means that if the market value had fallen below cost after the year end then the inventory would require an adjustment to market value. We therefore need to compare our valuation at 31st May 2010 which is $120 with the current market price of $146. Since Palermo’s valuation is lower then the market value, we will maintain our current valuation of $120 per case. As soon as we start paying $80 per case, the average cost will decline as long as cost prices remain that way. This however, will not apply to 31st May 2010. Furthermore, if later on, we see a reduction in market value below our current average cost of $120, we will have no other choice but to reduce our valuation to market value and to write off as an expense. Otherwise, our valuation as it stands currently is in keeping with GAAPs and IASs. Sincerely, …………………………. Chief Financial Officer References BPP. (2009). F7 Financial Reporting. 3rd Ed. London: BPP Learning Media. Hoyle, J. B and Skender, C. J (2010) Financial Accounting. Available at: http://www. flatworldknowledge. com/printed-book/90996

Thank's for Your Vote!
Incentory valuation. Page 1
Incentory valuation. Page 2
Incentory valuation. Page 3

This work, titled "Incentory valuation" was written and willingly shared by a fellow student. This sample can be utilized as a research and reference resource to aid in the writing of your own work. Any use of the work that does not include an appropriate citation is banned.

If you are the owner of this work and don’t want it to be published on AssignBuster, request its removal.

Request Removal
Cite this Essay

References

AssignBuster. (2021) 'Incentory valuation'. 22 December.

Reference

AssignBuster. (2021, December 22). Incentory valuation. Retrieved from https://assignbuster.com/incentory-valuation/

References

AssignBuster. 2021. "Incentory valuation." December 22, 2021. https://assignbuster.com/incentory-valuation/.

1. AssignBuster. "Incentory valuation." December 22, 2021. https://assignbuster.com/incentory-valuation/.


Bibliography


AssignBuster. "Incentory valuation." December 22, 2021. https://assignbuster.com/incentory-valuation/.

Work Cited

"Incentory valuation." AssignBuster, 22 Dec. 2021, assignbuster.com/incentory-valuation/.

Get in Touch

Please, let us know if you have any ideas on improving Incentory valuation, or our service. We will be happy to hear what you think: [email protected]