Steel Company, a wholesaler that has been in business for two years, purchases its inventory from various suppliers. During the two years, each purchase has been at a lower price than the previous purchase. Steel uses the lower of cost or market method to value inventories. The original cost of the inventory is above replacement cost and below their net realizable value. That is, the net realizable value less the normal profit margin is below replacement cost.

Required: What do you think about the criteria used to determine which costs should be included in the inventory? Summarize the reason for the amounts Steel Company’s inventory should be reported on the balance sheet by explaining the application of lower of cost or market rule in this situation. Appraise, judge, and support why the lower of cost or market rule is used to report inventory.

 

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