Case No. 3: Inventory Valuation Issues Prophet Company has recently signed a long-term purchase contract to buy timber from the United States Forest Service. The designated price is $300 per thousand board feet, which will end up totaling $6,000,000 for the year. Meanwhile, the current market price for timber is $250 per thousand board feet, a difference of $250. Unfortunately, Prophet Company has a predicament as the controller wants to record the inventory at market value, but is facing opposition from the financial vice president who wants to record inventory at cost. According to the controller, the market value has remained constant for months, which means the company should recognize the loss. The financial vice president’s counter argument is that the loss in value is temporary and should be ignored. According to the FASB, “the primary basis of accounting for inventories is cost, which has been defined generally as the price paid or consideration given to acquire an asset” (330-10-30-1). In this case, Prophet Company would initially record the inventory at cost, which is the exchange price of $6,000,000. However, the company must deviate from recording inventory at cost if the utility, revenue producing ability of an asset, declines. This adjustment to lower of cost or market is addressed by the Codification, which states “a departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost” (330-10-35-1). The change in utility could be cause by a variety of factors including physical deterioration, obsolescence, or changes in price levels. For Prophet Company, it is the decrease in price levels that will force them to adjust their inventory valuation. It is important to understand that recording inventory at cost is meant to properly match expenses and revenues, however the change in