Adjustments for Departures from the Costing Method Used--Inventory Valuation:

The problem of year end inventory valuation is primarily a question of the materials cost consumed in products manufactured and sold to customers and the cost assignable to goods in inventory ready to move into production and available for sales the next fiscal period. This question is important, because the materials ledger card would have to be adjusted for any change in units prices if there is a departure from the commonly used costing method. Since the new unit price could not be made available to the materials ledger clerk for some time after the year end inventory was taken and priced, the detailed task of changing hundreds and even thousands of costs would be cumbersome and time consuming. Therefore, instead of adjusting the ledger cards, companies may create an inventory valuation account, as illustrated by the following journal entry:

Cost of goods sold or factory overhead control	xxx	Dr
	Materials--Allowance for inventory decline to market	xxx  Cr
Inventory adjustment--Lower of cost or market

In the subsequent fiscal period, materials--allowance for inventory decline to market is closed out to cost of goods sold to the extent necessary to bring the materials consumed that are still carried at a higher cost to the desirable lower cost level.
Use of the valuation account retains the cost of the inventory and at the same time reduces the materials inventory for statement purposes to the desired cost or market, whichever is lower valuation without disturbing the materials ledger cards. The preceding entry should result in the following balance sheet presentation:

Material, at cost Less allowance for inventory decline to market Materials, at cost or market, whichever is lower

$100,000 5,000 --------

$95,000

The net charge to cost of goods sold may be shown in the cost of goods sold statement or deducted from the ending inventory at cost, thus increasing the cost of materials used. Whenever the lower of cost or market procedure is applied to each inventory item and the adjustment of materials ledger cards to a lower market figure is not burdensome and the data are available early in the next year, the adjustment should be accomplished by dating the entry with the last day of the fiscal period just ended and entering in the balance section the units on hand at the unit price determined for inventory purposes. In such a case, the credit portion of the adjusting entry would be to the materials account.

Inventory Pricing and Interim Financial Reporting--Inventory Valuation:

Companies should generally use the same inventory pricing methods and make provisions for write downs to make market at interim dates on the same basis as used at annual dates when preparing published financial statements. However, the following exceptions are appropriate at interim reporting dates:

1. Some companies use estimated gross profit rates to determine the cost of goods sold during interim periods or use other methods different from those used at annual inventory dates. These companies should disclose the method used at the interim date and any significant adjustments that result from reconciliations with the annual physical inventory.
2. Companies that use the LIFO method may encounter a liquidation of base period inventories at an interim date that is expected to be replaced by the end of the annual period. In such cases the inventory at the interim reporting date should not give effect to the LIFO liquidation, and cost of sales for the interim reporting period should include the expected cost of replacement of the liquidated LIFO base.
   
   Thus, if the liquidation of base period inventories is considered temporary and expected to be replaced prior to year, the company should charge cost of goods sold at current prices. The difference between the carrying value of the inventory and its current replacement cost is a current liability for replacement of temporarily depleted LIFO base inventory. When the liquidated inventory is replaced, inventory is debited for the original LIFO value and the liability is removed from the books.
3. Inventory losses from market declines should not be deferred beyond the interim period in which the decline occurs. Recoveries of such losses on the same inventory in later interim periods of the same fiscal year through market price recoveries should be recognized as gains in the later interim period such gains should not exceed previously recognized losses. Some market declines at interim dates, however, can reasonably be expected to be restored in the fiscal year. Such temporary market declines need not be recognized at the interim date since no loss is expected to be incurred in the fiscal year.