Canadian Paper Company (CPC) produces newsprint in its paper mills. At the end of 2011, CPC's chief financial officer noted that the international market price of newsprint had been dropping appreciably. Tonnes of newsprint produced in 2011 at an average cost of $520 per tonne could be sold at the end of December 2012 for only $505 per tonne. CPC has also been working to reduce its production costs, hoping that they can be reduced to $495 per tonne in 2012.
Required:
a. Why is the decline in the market price for newsprint relevant in this type of situation?
b. If CPC has 1,250 tonnes of newsprint on hand on December 31, 2011, at what dollar amount should inventory be reported?
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.