Main points for Exam #1

Main points for Exam #1 - Company abandons the historical...

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Company abandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost. Companies report inventories at the lower-of-cost- or-market. “Market” refers to the cost to reproduce, that companies value goods at cost or cost to replace, whichever is lover. A departure from cost is justified because a company should charge a loss of utility against revenues in the period in which the loss occurs, not in the period of sales. The lower-of-cost-or- market method is a conservative approach to inventory valuation. NRV is the estimated selling price in the ordinary course of business, less reasonable predictable costs of competition and disposal (often referred to as net selling price).A normal profit margin is subtracted from that amount to arrive at net realizable value less a normal profit margin. The general lower-of-cost-or-market rule is: A company values inventory at the L-O-C-M, with market limited to an amount that is not more than net realizable value or less than net realizable value less a normal profit margin. The upper ceiling is the net realizable value of inventory. The lower (floor) is the net realizable value less a normal profit margin. The max. limitation, not to exceed the net realizable value (ceiling), prevents overstatement of the value of obsolete or shopworn inventories. The min. limitation is not to be less than net realizable value reduced by an allowance for an approximately normal profit margin. The designated market value is the amount that a company compares to cost. It is always the middle value of three amounts: replacement cost, net realizable value, and net realizable value less a normal profit margin. Gross profit method use in situation to estimate of the company’s inventory. The gross profit percentage is stated as a percentage of selling price. Gross profit method has disadvantages: it provides an estimate, uses past percentages, careful in applying blanket gross
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Main points for Exam #1 - Company abandons the historical...

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