At the End of the First Year of a Firm's

Essay

At the end of the first year of a firm's operations, the total inventory at cost was $200 and the market value (for purposes of Lower of cost and NRV) was $220. The corresponding values at the end of years 2 and 3 are as follows: $\begin{array} { | l | l | l | } \hline & \text { Year 2 } & \text { Year 3 } \\\hline \text { Cost } \$ 400 & \$ 600 \\\hline \text { NRV } & 340 & 640 \\\hline\end{array}$ Explain how, in years 2 and 3, the direct reduction and allowance methods of applying Lower of cost and NRV result in the same reported amount of income. Assume $1,000 of purchases in each year.