### CFA Practice Question

There are 520 practice questions for this study session.

### CFA Practice Question

Today's Technology, Inc. manufactures personal computers. At the end of the year, the cost of their computer parts inventory is \$815,500 while the market value of the inventory is \$775,000. Expected selling-related costs for the inventory amount are approximately 1% of cost or \$8,155. Which of the following is the correct valuation of the inventory at the end of the year?

A. \$807,345
B. \$775,000
C. Neither of the above amounts. The inventory would be carried at its discounted present value.

At year-end, if market prices are lower than historical costs, inventory is carried at the current market price. This is an application of the conservatism principle.

User Comment
kalps Worng, if £8155 is cost of selling the invenory then the NRV is 775,000 less 8155, this is not an option so intuitively chose the right answer
Gina in practice, inventory costs don't include sales related costs [ie include only costs up to the point-of-sale].
storage costs are generally also not included.
Done The word "Expected" makes this tricky.
danlan What's period of expected selling related costs? It's not saying end of year 2010.

We know at the end of year 2010, cost is \$815500 and market value is \$775000. Using conservative principal, the valuation should be \$775000.
gaur Inventory is reported @ LCM. Where Cost = \$815,000 and Market is a range between NRV > x < NRV less Gross profit margin. NRV = Selling Price - Selling cost. Clearly NRV in this case is \$766,845 i.e the higher end of the range, thus inventory should be written down to atleast \$766,845.
If we had a gross profit margin (5% since the company is in lower profit margin industry) Market would be \$728, 503
nagri You are not asked to state inventory at NRV. Only at cost(including all costs incurred to acquire) or at market price whichever is lower. The selling costs are recognized only when they are sold.
thud The question is asking for the value of the ending inventory. The answer is pretty straightforward...