Canadian Paper Company (CPC) produces newsprint in its paper mills. At the end of 2016, CPC’s chief financial officer noted that the international market price of newsprint had dropped significantly. The average cost of production for newsprint in 2016 was $520 per tonne. The average selling price for newsprint in January 2017 was $505 per tonne. CPC has also been working to reduce its production costs, hoping that they can be reduced to $495 per tonne in 2017.
Required:
a. Why is the decline in the market price for newsprint relevant in this situation?
b. If CPC has 1,250 tonnes of newsprint on hand on December 31, 2016, what amount should be reported for ending inventory on the statement of financial position?
c. What other information would be relevant in determining the year-end reporting amount?
d. Which accounting concepts are relevant in deciding the dollar amount of inventory to be reported? Explain why these concepts are important.