C08 - 1 Chapter 8 Inventories: Inventories: Special...

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1 Inventories: Inventories: Special Valuation Special Valuation Issues Issues C hapter 8 An electronic presentation by Douglas Cloud Pepperdine University
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2 1. Understand the lower of cost or market method. 2. Explain the conceptual issues regarding the lower of cost or market method. 3. Understand purchase obligations and product financing arrangements. 4. Explain the valuation of inventory above cost. 5. Use the gross profit method. Objectives Continued Continued
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3 6. Understand the retail inventory method. 7. Explain the conceptual issues regarding the retail inventory method. 8. Understand the dollar-value LIFO retail method. 9. Understand the effects of inventory errors on the financial statements. Objectives
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4 Lower of Cost or Market The lower of cost or market rule requires that a company write down its inventory to market value when the inventory’s utility has declined.
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5 Lower of Cost or Market Selection of Market Value Ceiling (Net Realizable Value) Replacement Cost Floor (Net Realizable Value - Normal Profit) Comparison to Cost Use lower of (a) cost or (b) selected market value Reporting the Results Balance sheet: Inventory at LCM Income statement: Loss (if recognized)
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6 Lower of Cost or Market A company’s unit of inventory has the following characteristics: Selling price $165 Packaging cost 10 Transportation cost 15 Profit margin 40
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7 Lower of Cost or Market Selling price $165 Cost of completion (10 ) Transportation cost (15 ) Ceiling (NRV) $140 Ceiling (NRV) $140 Normal profit (40 ) Floor $100 Normal Profit = $40 Normal Profit = $40 Case 1 Case 1
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8 Current Replacement Cost, $120 Lower of Cost or Market Cost $110 Market $120 Current Replacement Cost, $120 Normal Profit = $40 Normal Profit = $40 LCM is the cost of $110 Case 1 Case 1 Selling price $165 Cost of completion (10 ) Transportation cost (15 ) Ceiling (NRV) $140 Ceiling (NRV) $140 Normal profit (40 ) Floor $100
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9 Lower of Cost or Market Cost $110 What is market? Current Replacement Cost, $150 LCM is the cost of $110 Case 2 Case 2 Mkt. = $140 Current Replacement Cost, $150 Ceiling (NRV) $140 Normal profit (40 ) Floor $100 Normal Profit = $40 Normal Profit = $40 Selling price $165 Cost of completion (10 ) Transportation cost (15 ) Ceiling (NRV) $140
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10 Current Replacement Cost, $75 Lower of Cost or Market Cost $110 What is market? Current Replacement Cost, $75 LCM is the cost of $110 Case 3 Case 3 Mkt. = $120 Selling price $165 Cost of completion (10 ) Transportation cost (15 ) Ceiling (NRV) $140 Ceiling $140 Normal profit (20 ) Floor $120 Normal Profit = $20 Normal Profit = $20
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11 Lower of Cost or Market Try one more.
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12 Lower of Cost or Market Cost $110 What is market? Current Replacement Cost, $105 Normal Profit = $40 Normal Profit = $40 LCM is the market of $105 Case 4 Case 4 Mkt. = $105 Selling price $165 Cost of completion (10 ) Transportation cost (15 ) Ceiling (NRV) $140 Ceiling (NRV) $140 Normal profit (40 ) Floor $100
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13 Lower of Cost or Market Inventory Cost Market Category A: Item 1 $1,000 $ 700 $ 700 Item 2 1,200 1,300 1,200 $2,200 $2,000 Category B: Item 3 $2,000 $2,400 2,000 Item 4 2,500 2,200 2,200 $4,500 $4,600 Total $6,700 $6,600 Inventory valuation $6,100 Individual Items Loss recognition, $600
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14 Lower of Cost or Market Inventory Cost Market Category A: Item 1 $1,000 $ 700 Item 2 1,200 1,300 $2,200 $2,000 $2,000 Category B: Item 3 $2,000 $2,400 Item 4 2,500 2,200 $ 4,500 $4,600 4,500 Total $6,700 $6,600 Inventory valuation $6,500 Category Loss recognition, $200
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This note was uploaded on 02/18/2011 for the course ECON 101 taught by Professor Unknown during the Spring '10 term at University of Toronto- Toronto.

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C08 - 1 Chapter 8 Inventories: Inventories: Special...

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