ch09 - CHAPTER 9 INVENTORIES: INVENTORIES: ADDITIONAL...

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Unformatted text preview: CHAPTER 9 INVENTORIES: INVENTORIES: ADDITIONAL VALUATION ISSUES ADDITIONAL (Appendix A included) Intermediate Accounting I Prof. Volkan Muslu Chapter 9 -1 Lower-of-Cost-or-Market Rationale Abandon thehistorical cost principlewhe thefutureutility : n (re nue ve -producing ability) of inve ntory drops be its original cost. low USGAAP: Marke = Re t place e or Re m nt production C ost I FRS Marke = Ne Re : t t alizableValue(usual se lling pricene of com tion t ple and disposal costs) Loss should bere corde whe loss occurs, not in thepe of sale d n riod . Chapter 9 -2 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market C iling and Floor of Re e place e C m nt ost De clinein theRCusually indicate de s clinein se lling priceand profit S e e RCm not accurate indicatethis de . om tim s ay ly cline The weusetwo lim n itations C iling - ne re e t alizablevalueand Floor - ne re t alizablevaluele a norm profit m ss al argin. RCuse if proble is dueto factors fromnorm courseof busine (i.e slowd m al ss. ., m oving, obsole , and surplus inve te ntory). NRV in othe situations (i.e r ., physical dam ). age Chapter 9 -3 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market Illustration 9-3 C iling = NRV e C ost Marke t Not > Re place e m nt C ost GAAP LC M Not < Floor = NRV le Norm ss al Profit Margin Chapter 9 -4 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market How LC Works (I ndividual I tems) M Illustration 9-5 Chapter 9 -5 S olution on note page s LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market Othe Me r thods of Applying LC M Illustration 9-6 Chapter 9 -6 S olution on note page s LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market Recording LCM (data fromI llus. 9-5 and 9-6) $ 415,000 350,000 $ 65,000 65,000 65,000 Ending inve ntory (cost) Ending inve ntory (LC M) Adjustm nt to LC e M Allowance Me thod Loss on inve ntory Allowanceon inve ntory Dire ct Me thod C of goods sold ost I nve ntory 65,000 65,000 Chapter 9 -7 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market Balance Sheet Presentation Allowance Cur r ent asset s: Cash A ccount s r eceivable I nvent or y Less: invent or y allowance * Pr epaids T ot al cur r ent asset s $ 100, 000 350, 000 770, 000 (65, 000) 20, 000 1, 175, 000 2 0, 000 1 , 175, 000 $ 1 00, 000 3 50, 000 7 05, 000 Dir ect * C pute e ry ye and m m om d ve ar ust atch with inve ntory on hand. Chapter 9 -8 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . LO Lower-of-Cost-or-Market I ncom S m nt Pre ntation e tate e se Sales C ost of goods sold Gross prof it Operat ing expenses: Selling General and adm inist rat ive Tot al operat ing expenses Ot her revenue and expense: Loss on invent ory I nt erest incom e Tot al ot her I ncom f rom operat ions e I ncom t ax expense e Net incom e Chapter 9 -9 Allowance $ 300, 000 120, 000 180, 000 45, 000 20, 000 65, 000 65, 000 5, 000 (60, 000) 55, 000 16, 500 $ 38, 500 $ $ Direct 300, 000 185, 000 115, 000 45, 000 20, 000 65, 000 5, 000 5, 000 55, 000 16, 500 38, 500 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . LO Lower-of-Cost-or-Market Lower-of-Cost-or-Market P9-1: KCCompany manufactures desks. Thecompany attempts to obtain a 20%gross m argin on se lling price At De m r 31, 2010, thefollowing finishe de appe in the . ce be d sks ar com pany’s inve ntory. Finished Desks I nventory cost Est . cost t o manuf acture Commissions and disposal costs Cat alog selling price A $ 470 460 50 500 B $ 450 430 60 540 C $ 830 610 80 900 D $ 960 1, 000 130 1, 200 At what am ount should thede appe in thecom sks ar pany’s De m r 31, 2010 inve ce be ntory, assum that thecom ing pany has adopte a lowe d r-of-FIFO-cost-or-m t approach for arke valuation of inve ntorie on an individual-ite basis? s m Chapter 9-10 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market Finished Desks I nvent or y cost Est . cost t o manuf act ur e Commissions and disposal cost s Cat alog selling pr ice A $ 470 460 50 500 C iling = 450 e (500 – 50) Not > Re place e m nt C = 460 ost C = 470 ost Marke = 450 t Not < Floor = 350 (450-(500 x 20% )) LC = 450 M Chapter 9-11 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market Finished Desks I nvent or y cost Est . cost t o manuf act ur e Commissions and disposal cost s Cat alog selling pr ice B $ 450 430 60 540 C iling = 480 e (540 – 60) Not > Re place e m nt C = 430 ost C = 450 ost Marke = 430 t Not < Floor = 372 (480-(540 x 20% )) LC = 430 M Chapter 9-12 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market Finished Desks I nvent or y cost Est . cost t o manuf act ur e Commissions and disposal cost s Cat alog selling pr ice C $ 830 610 80 900 C iling = 820 e (900 – 80) Not > Re place e m nt C = 610 ost C = 830 ost Marke = 640 t Not < Floor = 640 (820-(900 x 20% )) LC = 640 M Chapter 9-13 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market Finished Desks I nvent ory cost Est . cost t o manuf act ure Commissions and disposal cost s Cat alog selling price D $ 960 1, 000 130 1, 200 C iling = 1,070 e (1,200 – 130) Not > Re place e m nt C = 1,000 ost C = 960 ost Marke = 1,000 t Not < Floor = 830 (1,070-(1,200 x 20% )) LC = 960 M Chapter 9-14 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Lower-of-Cost-or-Market Lower-of-Cost-or-Market Evaluation of LC Rule M Expe re nse corde whe loss in utility occurs. Profit on salere d n cognize at the d point of sale . I nve ntory value at cost in oneye and at m t in thene ye d ar arke xt ar. Diffe nt le ls of conse re ve rvatism Ne incom in ye of loss vs. subse nt ye ?t e ar que ars (cookiejar re rve se s?). “Norm profit” in de rm al te ining inve ntory value subje ? s: ctive Chapter 9-15 LO 1 De scribeand apply thelowe r-of-cost-or-m t rule arke . Valuation Bases Ne Re t alizableValue Pe itte by GAAP (e n if abovecost ) if: rm d ve (1) The is a controlle m t with a quote priceapplicableto all quantitie and re d arke d s, (2) The is no significant costs of disposal (rarem tals and agricultural products) re e or (3) I t is difficult to obtain de finitivecost figure (m atpacking) se Chapter 9-16 LO 2 Explain whe com n panie valueinve s ntorie at ne re s t alizablevalue . Valuation Bases Re lativeS s Value ale Use whe buying varying units in a singlelum d n p-sumpurchase . • I de ntify groups of inve ntory. • C putethetotal cost om • C putetheunit om of e inve ach ntory group by allocating total cost to e ach group’s re lativesale price s . cost pe inve r ntory in thegroup. • C puteC om OGSand re aining balance m . Chapter 9-17 LO 3 Explain whe com n panie usethere s lativesale valuem thod s e LO to valueinve ntorie s. to Valuation Bases PurchaseC m e om itm nts S lle re e r tains titleto them rchandise e . Buye re r cognize no asse or liability. s t I f m rial, thebuye should disclosecontract de ate r tails in footnote . I f thecontract priceis gre r than t hem t price and thebuye e cts ate arke , r xpe t hat losse will occur, thebuye should re s r cognizelosse in thepe during s riod which such de s in m t price takeplace cline arke s . Chapter 9-18 LO 4 Discuss accounting issue re d to purchasecom itm nts. s late me Valuation Bases I llustration: S Re Pape C signe tim r-cutting contracts to be t. gis r o. d be e cute in 2012 at a priceof $10,000,000. Assum furthe that them t xe d e r arke priceof thetim r cutting rights on De m r 31, 2011, droppe to be ce be d $7,000,000. S Re would m thefollowing e on De m r 31, 2011. t. gis ake ntry ce be Unre d Holding Gain or Loss—I ncom alize e Estim d Liability on PurchaseCom itm nts ate me 3,000,000 3,000,000 Chapter 9-19 LO 4 Discuss accounting issue re d to purchasecom itm nts. s late me Valuation Bases I llustration: Whe S Re cuts thetim r at a cost of $10 m n t. gis be illion, it would m thefollowing e ake ntry. Purchase (I nve s ntory) Estim d Liability ate C ash 7,000,000 3,000,000 10,000,000 If C ongre pe itte S Re to re ss rm d t. gis duceits contract priceand the foreits re com itm nt by $1,000,000. me Estim d Liability ate Unre d Holding Gain or Loss—I ncom alize e Chapter 9-20 1,000,000 1,000,000 LO 4 Discuss accounting issue re d to purchasecom itm nts. s late me Gross Profit Method To approxim inve ate ntory e cially during inte pe spe rim riods or whe n physical counting is im possible if wearece , rtain of thefollowing: (1) Be ginning inve ntory plus purchase e s qual total goods to beaccounte d f or. (2) Goods not sold m beon hand. ust (3) Thesale re d to cost, de s, duce ducte fromthesumof theope d ning inve ntory plus purchase e s, qual e nding inve ntory. Chapter 9-21 LO 5 De rm e te ine nding inve ntory by applying thegross profit m thod. e Gross Profit Method I llustration: C tus C has a be e orp. ginning inve ntory of $60,000 and purchase s of $200,000, both at cost. S s at se ale lling priceam ount to $280,000. Thegross profit on se lling priceis 30 pe nt. C tus applie thegross m rce e s argin m thod as e f ollows. I llustration 9-13 Chapter 9-22 LO 5 De rm e te ine nding inve ntory by applying thegross profit m thod. e Gross Profit Method Gross E9-12: AstaireC pany use thegross profit m thod to e ateinve om s e stim ntory for m onthly re porting purpose Pre nte be is inform s. se d low ation for them onth of May. I nvent or y, May 1 Pur chases (gr oss) Fr eight - in S ales S ales r et ur ns Pur chase discount s $ 160, 000 640, 000 30, 000 1, 000, 000 70, 000 12, 000 Instructions: (a) C putethee ate inve om stim d ntory at May 31, assum that thegross profit is 25%of sale . ing s (b) C putethee ate inve om stim d ntory at May 31, assum that thegross profit is 25%of cost . ing Chapter 9-23 LO 5 De rm e te ine nding inve ntory by applying thegross profit m thod. e Gross Profit Method E9-12 (S olution): (a) Com putethee ate inve stim d ntory assum gross profit is 25%of sale . ing s I nvent ory, May 1 (at cost ) Purchases (gross) (at cost ) Purchase discount s Freight - in Goods available (at cost ) Sales (at selling price) Sales ret urns (at selling price) Net sales (at selling price) Less gross prof it (25% of $ 930, 000) Sales (at cost ) Approximat e invent ory, May 31 (at cost ) $ $ 1 , 000, 000 ( 70, 000) 9 30, 000 2 32, 500 6 97, 500 1 20, 500 $ 1 60, 000 6 40, 000 ( 12, 000) 3 0, 000 8 18, 000 Chapter 9-24 LO 5 De rm e te ine nding inve ntory by applying thegross profit m thod. e Gross Profit Method E9-12 (S olution): (b) Com putethee ate inve stim d ntory assum gross profit is 25%of cost . ing I nvent ory, May 1 (at cost ) Purchases (gross) (at cost ) Purchase discount s Freight - in Goods available (at cost ) Sales (at selling price) Sales ret urns (at selling price) Net sales (at selling price) Less gross prof it (20% of $ 930, 000) Sales (at cost ) Approximat e invent ory, May 31 (at cost ) $ $ 1 , 000, 000 ( 70, 000) 9 30, 000 1 86, 000 7 44, 000 7 4, 000 $ 1 60, 000 6 40, 000 ( 12, 000) 3 0, 000 8 18, 000 25% 100%+ 25% = 20%of sale s Chapter 9-25 LO 5 De rm e te ine nding inve ntory by applying thegross profit m thod. e Gross Profit Method Evaluation of Gross Profit Me thod (1) Provide an e ateof e s stim nding inve ntory. (2) Use past pe ntage and a blanke gross profit in calculation. S s rce s t afe assum ption? (3) Only acce ptablefor inte (ge rally quarte re rim ne rly) porting purpose s. Chapter 9-26 LO 5 De rm e te ine nding inve ntory by applying thegross profit m thod. e Retail Inventory Method Retail A m thod use by re rs, to valueinve e d taile ntory without a physical count, by conve rting re price to cost. Popular in re tail s tailing.. Diffe nt ve re rsions includecost, LC LI FO, dollar-valueLIFO m thods. M, e P9-8: FuqueI nc. use there inve s tail ntory m thod to e atee e stim nding inve ntory for its m onthly f inancial state e Thefollowing data pe m nts. rtain to a singlede partm nt for them e onth of Octobe r 2011. COST $ 52,000 272,000 16,600 5,600 RETAIL $ 78,000 423,000 8,000 9,000 2,000 3,600 10,000 390,000 Beg. inventory, Oct. 1 Purchases Freight in Purchase returns Additional markups M arkup cancellations M arkdowns (net) Normal spoilage Sales Chapter 9-27 Estim re inve ate tail ntory using thefollowing m thods: e (1) C ost (2) LCM LO 6 De rm e te ine nding inve ntory by applying there inve tail ntory m thod. e Retail Inventory - Cost Method P9-8 Solution - Cost Method Beg. inventory Purchases Freight in Purchase returns M arkdowns, net M arkups, net Current year additions Goods available for sale Normal spoilage Sales Ending inventory at retail Ending inventory at Cost: $ 96,400 x 67.49% = Chapter 9-28 COST $ 52,000 272,000 16,600 (5,600) RETAIL $ 78,000 423,000 (8,000) (3,600) 7,000 418,400 496,400 = (10,000) (390,000) $ 96,400 Cost to Retail % 283,000 335,000 / 67.49% $ 65,056 LO 6 De rm e te ine nding inve ntory by applying there inve tail ntory m thod. e Retail Inventory - LCM Method P9-8 Solution - LCM (CONVENTIONAL) Method: Beg. inventory Purchases Freight in Purchase returns M arkups, net Current year additions Goods available for sale M arkdowns, net Normal spoilage Sales Ending inventory at retail Ending inventory at Cost: $ 96,400 x 67.00% = Chapter 9-29 COST $ 52,000 272,000 16,600 (5,600) 283,000 335,000 RETAIL $ 78,000 423,000 (8,000) 7,000 422,000 500,000 = (3,600) (10,000) (390,000) $ 96,400 Cost to Retail % / 67.00% $ 64,588 LO 6 De rm e te ine nding inve ntory by applying there inve tail ntory m thod. e Retail Inventory Method – LIFO Retail The primary difference in the LIFO retail and other retail methods is that the cost-to-retail percentages are computed only based on current year activities Cost Beginning inventory— 2010 Net purchases during the period Net markups Net markdowns Total (excluding beginning inventory) Total (including beginning inventory) Net sales during the period Ending inventory at retail Ending Inventory at Layers at C retail cost- to- retail percentage under assumptions of LIFOost- to- Retail % Retail Prices—495,000) Retail Prices ($ 346,500 / $ 2010 $ 56,000 2009 2010 Chapter 9-30 Retail $ 45,000 480,000 20,000 ( 5,000) $ 27,000 346,500 346,500 $ 373,500 495,000 540,000 ( 484,000) $ 56,000 Ending Inventory 70% at LIFO Cost = = $ 27,000 7,700 $ 34,700 $ 45,000 11,000 $ 56,000 60% 70 Retail Inventory Method – Dollar value LIFO Retail Cost Beginning inventory— 2010 Net purchases during the period Net markups Net markdowns Total (excluding beginning inventory) Total (including beginning inventory) Net sales during the period Ending inventory at retail Cost-to-retail percentage under assumptions of LIFO retail ($ 346,500 / $ 495,000) Ending inventory (retail) at base year prices (56,000/1.12) Ending Inventory Layers at Retail Price at Retail Prices— Prices Index Beginning inventory (retail) at base year prices 2010 $ 50,000 Chapter 9-31 Retail $ 45,000 480,000 20,000 ( 5,000) $ 27,000 346,500 346,500 $ 373,500 495,000 540,000 ( 484,000) $ 56,000 70% 50,000 Ending Inventory at 45,000 LIFO Cost = = $ 27,000 3,920 $ 30,920 Cost- to- Retail % 2009 2010 $ 45,000 5,000 $ 50,000 100 112 60% 70 Re I nve tail ntory Evaluation of Retail Inventory Method S ecom om panie re there m thod by com s fine tail e puting inve ntory se parate by ly de partm nts or class of m rchandisewith sim gross profits (spe pools). e e ilar cific Wide use for thefollowing re ly d asons: (1) (2) (3) (4) No ne d for a physical count of inve e ntory, De rm inve te ine ntory shortage s, Re gulatequantitie of m rchandiseon hand, and s e I nsuranceinform ation. Chapter 9-32 On April 16, 2001, the Company announced a restructuring program to prioritize its initiatives around high-growth On areas of its business, focus on profit contribution, reduce expenses, and improve efficiency due to macro-economic and capital spending issues affecting the networking industry. This restructuring program includes a worldwide workforce reduction, consolidation of excess facilities, and restructuring of certain business functions. workforce As a result of the restructuring program and decline in forecasted revenue, the Company recorded restructuring costs and other special charges of $1.17 billion classified as operating expenses and an additional excess inventory charge of $2.25 billion classified as cost of sales. inventory The following paragraphs provide detailed information relating to the restructuring costs and other special charges and provision for inventory which were recorded during the third quarter of fiscal 2001. provision Worldwide workforce reduction Worldwide The restructuring program will result in the reduction of approximately 6,000 regular employees across all business The functions, operating units, and geographic regions. The worldwide workforce reductions started in the third quarter of of fiscal 2001 and will be substantially completed in the fourth quarter of fiscal 2001. The Company recorded a workforce fiscal reduction charge of approximately $397 million relating primarily to severance and fringe benefits. In addition, the number of temporary and contract workers employed by the Company will also be reduced. number Consolidation of excess facilities and other special charges Consolidation The Company recorded a restructuring charge of $484 million relating to consolidation of excess facilities and other The special charges. The consolidation of excess facilities includes the closure of certain corporate facilities, sales offices, and operational centers related to business activities that have been exited or restructured. The Company recorded a restructuring charge of approximately $263 million for excess facilities relating primarily to lease terminations and non-cancelable lease costs. Property and equipment that was disposed or removed from Chapter 9-33 operations resulted in a charge of $141 million and consisted primarily of EXAMPLE: CISCO Q3 2001 FINANCIALS RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES AND PROVISION FOR INVENTORY CISCO Q3 2001 FINANCIALS RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES AND PROVISION FOR INVENTORY lleasehold improvements, computer equipment and related software, production and engineering equipment, and office easehold equipment, furniture, and fixtures. The Company also recorded other restructuring costs and special charges of $80 million relating primarily to payments to suppliers and vendors $80 to terminate agreements and professional fees incurred in connection with the restructuring activities. Impairment of goodwill and purchased intangible assets Impairment Due to the decline in current business conditions, the Company restructured certain of its businesses and realigned Due resources to focus on profit contribution, high-growth markets, and core opportunities. As a result, the Company recorded a charge of $289 million related to the impairment of goodwill and purchased intangible assets, measured as the amount by which the carrying amount exceeded the present value of the estimated future cash flows for goodwill and purchased intangible assets, as follows (in millions): flows Amount Amount Acquired Company Impaired ------------------------------------------Monterey Networks, Inc. Monterey HyNEX, Ltd. Clarity Wireless, Inc. Clarity (Broadband Customer Premise Equipment) (Broadband Other Total Total $ 108 79 53 49 --------$ 289 ===== ===== Chapter 9-34 The results of operations relating to these businesses are not material on either an individual or an aggregate basis. The CISCO Q3 2001 FINANCIALS RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES AND PROVISION FOR INVENTORY A summary of the restructuring costs and other special charges is outlined as follows (in millions): Restructuring Restructuring Total Noncash Cash Liabilities at Total Charge Charges Payments April 28, 2001 Charge -----------------------------------------------Workforce reduction $ 397 Workforce Consolidation of excess facilities and other charges 484 facilities Impairment of goodwill and purchased intangible assets 289 purchased ----------Total $1,170 ====== ====== $ (71) (141) (289) ----$(501) ===== $(1) --$(1) === $326 342 ---$668 ==== Remaining cash expenditures relating to workforce reductions and termination of agreements will be substantially paid in the fourth quarter of fiscal 2001. Amounts related to the net lease expense due to the consolidation of facilities will be paid over the respective lease terms through fiscal 2007. The Company expects to substantially complete implementation of its restructuring program during the next six months. restructuring Provision for Inventory Provision The Company recorded a provision for inventory, including purchase commitments, totaling $2.36 billion during the third quarter of fiscal 2001, of which $2.25 billion related to an additional excess inventory charge. This additional excess inventory charge was due to a sudden and significant decrease in forecasted revenue and was calculated in accordance with the Company's policy, which is based on inventory levels in excess of 12-month demand for each specific product. specific Chapter 9-35 Presentation and Analysis Pre ntation: se Accounting standards re quiredisclosureof: (1) com position of theinve ntory, (2) financing arrange e and m nts, (3) costing m thods e ploye e m d. Analysis: C m ratios use in them om on d anage e and e m nt valuation of inve ntory le ls ve areinve ntory turnove and ave days to se theinve r rage ll ntory. Chapter 9-36 LO 7 Explain how to re and analyzeinve port ntory. Presentation and Analysis Ave Days to S ll rage e I nve ntory 365 days / 7.5 tim s = e ry 48.7 days e ve Chapter 9-37 LO 7 Explain how to re and analyzeinve port ntory. U.S GAAP pe its theuseof LI FO for inve . rm ntory valuation. iGAAP prohibits its use . In thelowe r-of-cost-or-m t te for inve arke st ntory valuation, iGAAP de s m t as ne fine arke t re alizablevalue U.S GAAP de s m t as re . . fine arke place e cost subje to theconstraints. m nt ct In U.S GAAP, inve . ntory writte down unde thelowe n r r-of-cost-or-m t valuation m arke ay not bewritte back up to its original cost in a subse nt pe n que riod. Unde iGAAP, the r write -down m bere rse in a subse nt pe ay ve d que riod. Chapter 9-38 ...
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This note was uploaded on 02/14/2011 for the course AIM 6330 taught by Professor Volkanmuslu during the Spring '10 term at University of Texas at Dallas, Richardson.

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