Introduction:
Lower of Cost or market value method: Lower of Cost or market value method is applied to find the cost of ending inventory to be recorded in the book of account. According to this method the cost is compared with the market value and inventory is recorded with the lower amount of cost or market value.
Inventory Turnover Ratio: Inventory Turnover Ratio measures the efficiency of the company in converting its inventory into sales. It is calculated by dividing the Cost of goods sold by Average inventory. The formula of the Inventory Turnover Ratio is as follows:
Note: Average inventory is calculated with the help of following formula:
Day’s sales in inventory: Days sales in inventory represent the number of days the inventory waits for the sale. It is calculated by dividing the 365 days by Inventory Turnover Ratio. The formula of the Days sales in inventory is as follows:
Requirement-1:
To Calculate: The lower of cost or market value of the inventory applying to inventory as a whole and need to any adjustment in inventory reporting value.
Requirement-2:
To Calculate: The lower of cost or market value of the inventory applying to each product of inventory and need to any adjustment in inventory reporting value.
Requirement-3:
To Calculate: The Inventory turnover ratio and days sales in inventory
Requirement-4:
To Determine: The performance of company by comparing the results of inventory turnover ratio and days sales in inventory with its competitors
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Fundamental Accounting Principles
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