CHAPTER 9 Inventories Additional Valuation Issues

CHAPTER 9 Inventories Additional Valuation Issues -...

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Unformatted text preview: 9-1CHAPTER 9Inventories: Additional Valuation Problems9-2LECTURE OUTLINEThis chapter describes inventory valuation problems and estimation techniques. Thechapter can be covered in three to four class sessions. The fourth class session wouldgenerally be used to cover Appendix 9-A. Appendix 9-A describes the application ofthe LIFO retail method under two assumptions: (1) stable prices and (2) fluctuatingprices.Most students have had only brief previous exposure to the chapter topics. Forexample, many students are aware of the LCM valuation rule for inventory but have notdealt with the ceiling and floor constraints. Similarly, many students were exposed to aretail inventory method (usually the conventional retail method) but have no experiencewith LIFO retail, and are unfamiliar with such complications as markups, markdowns,employee discounts, normal and abnormal spoilage, etc.Emphasize that the Chapter 9 inventory techniques do not represent completedepartures from the FIFO, LIFO, and average cost bases of valuing inventory. Forexample, the LCM rule results in inventory being stated at the lower of FIFO cost ormarket," or "lower of average cost or market," etc. Similarly, the retail method can beadapted to approximate any of the major cost flow assumptions: FIFO, LIFO, oraverage cost.The following lecture outline is appropriate for this chapter.A. Lower of Cost or Market (LCM).1.The general rule is that the historical cost principle is abandoned when thefuture utility of the asset is no longer as great as its original cost.2.The term "market" in the LCM rule means the cost to replace the item bypurchase or reproduction. This is a measurement of entry value.a.The market amount is limited by ceiling and floor restrictions that are basedon measurements of exit value.(1)The ceilingis equal to net realizable value: estimated selling priceless estimated disposal cost.(2)The flooris equal to the ceiling less normal profit margin.b.Point out the reasons for this lower of cost or "constrained market" rule:9-3(1)A decline in the selling price of an item is not always accompanied bya decline in cost. That is, entry values do not always respondimmediately and proportionately to changes in exit values. (SeeWarner and Whitehurst, bibliography reference 9.)(2)If an item has not lost its revenue-producing power, a writedown toreplacement cost in the current period would understate currentincome and overstate income in the period of sale.3.Describe the two-step computational approach to LCM valuation:TEACHING TIPIllustration 9-1can be used to discuss the lower of cost or market technique. The 2-step approach is demonstrated for two different examples.a.First find the designated "market" figure: This is the middlevalue ofreplacement cost, the ceiling, and the floor....
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This note was uploaded on 01/10/2011 for the course FSD 201 taught by Professor Huong during the Spring '10 term at Beacon FL.

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CHAPTER 9 Inventories Additional Valuation Issues -...

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