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.
Correct Answer: B

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 Contributed Comments 14

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...
quanttrader min(mkt price,historical cost)
ThanhBUI assuming US GAAP
johntan1979 Always assume GAAP. Besides, question never provides the estimated selling price to calculate the NRV, only the estimated cost to complete i.e. $8,155
quanttrader assumes GAAP: min (historical cost, mkt price) vs IAS : min (NRV, historical cost)-- here NRV is estimated sales price - sales costs = 766,845
geofin A third to a half of all CFA takers are from IFRS countries now. So, assuming GAAP is not a no-brainer.
johntan1979 Estimated selling price is NOT the same as market cost/value of inventory.

Agree with you, geofin. In 2011, almost 60% of new charterholders are non-GAAP.
Hulljc41 The correct answer is A. When a question does not state GAAP or IFRS, it is assumed that it is IFRS. The question does not state GAAP or IFRS but gives the GAAP answer.
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