Better Buy has six CD players in inventory on December 31. The players were purchased in November for $170. The price lists from suppliers indicate the current replacement cost of a CD player to be $168. What is the effect on gross profit if Better Buy values its ending merchandise inventory using the lower-of-cost-or-market rule?

Question

Quizplus · Accepted Answer

Using the lower-of-cost-or-market rule, Better Buy would value its ending inventory at the current replacement cost of $168, which is lower than the cost of $170. This means that the value of the inventory would decrease by $2 per CD player, for a total decrease of $12. Since gross profit is calculated as revenue minus the cost of goods sold, and the cost of goods sold would not change, the decrease in inventory value would result in a decrease in gross profit by the same amount of $12.

Better Buy Has Six CD Players in Inventory on December