Total Inventory Cost and NRV Calculation
What is the total cost of the entire inventory?
Based on the data given, calculate the total cost of all inventory items.
Would each inventory item be reported at cost or net realizable value (NRV)?
Determine whether each inventory item should be reported at cost or NRV.
How do you prepare the necessary entry to write down inventory from cost to net realizable value?
What journal entry should be made to adjust the inventory from cost to NRV?
Total Inventory Cost Calculation
To calculate the total cost of the entire inventory, we can use the following formula:
Total Cost = (Vans Quantity * Vans Cost) + (Trucks Quantity * Trucks Cost) + (2-door sedans Quantity * Cost) + (4-door sedans Quantity * 4-door sedans Cost) + (Sports cars Quantity * Sports cars Cost) + (SUVs Quantity * SUVs Cost)
After performing the calculations, the total cost of the entire inventory amounts to $533,800.
Inventory Reporting at Cost or NRV
Based on the data:
- Vans: NRV value of $24,000
- Trucks: NRV value of $16,800
- 2-door sedans: Cost value of $12,800
- 4-door sedans: Cost value of $16,800
- Sports cars: NRV value of $36,000
- SUVs: NRV value of $27,000
After calculating, the total NRV is $506,600.
Journal Entry for Inventory Write-Down
To write down inventory from cost to net realizable value, the following entry should be made:
Inventory Write-Down Expense Dr. $27,200
Allowance for Inventory Write-Down Cr. $27,200
The write-down of inventory from cost to net realizable value reduces total assets and increases total expenses, leading to lower net income and lower retained earnings.
Inventory management is crucial for businesses to maintain accurate financial records and assess the value of their assets. By understanding the total cost of inventory and whether items should be reported at cost or NRV, companies can make informed decisions about their finances.
Calculating the total cost of inventory involves multiplying the quantity of each item by its corresponding cost. This provides a clear picture of the company's investment in its products. Additionally, determining whether an item should be reported at cost or NRV helps in presenting a more accurate representation of the inventory's value.
The journal entry to write down inventory from cost to NRV reflects the adjustment needed to align the reported value of inventory with its realizable value. This adjustment impacts the company's financial statements, especially in terms of total assets, expenses, net income, and retained earnings.
By following proper inventory management practices and understanding the financial implications of inventory adjustments, businesses can maintain transparency and accuracy in their financial reporting.