Kieso_Inter_13e_Ch09

Kieso_Inter_13e_Ch09 - CHAPTER 9 INVENTORIES: INVENTORIES:...

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Chapter 9-1 C H A P T E R C H A P T E R 9 9 INVENTORIES: INVENTORIES: ADDITIONAL VALUATION ISSUES ADDITIONAL VALUATION ISSUES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield
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Chapter 9-2 Market = Replacement Cost Lower of Cost or Replacement Cost Loss should be recorded when loss occurs, not in the period of sale. A company abandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost. Lower-of-Cost-or-Market LCM
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Chapter 9-3 Decline in the RC usually = decline in selling price. RC allows a consistent rate of gross profit. If reduction in RC fails to indicate reduction in utility, then two additional valuation limitations are used: Ceiling - net realizable value and Floor - net realizable value less a normal profit margin. Why use Replacement Cost (RC) for Market? Lower-of-Cost-or-Market Ceiling and Floor
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Chapter 9-4 Not Not < Cost Market Ceiling = NRV Replacement Floor = NRV less Normal Profit Margin GAAP LCM What is the rationale for the and and Floor Floor limitations? Lower-of-Cost-or-Market Not Not > Illustration 9-3
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Chapter 9-5 Ceiling – prevents overstatement of the value of obsolete, damaged, or shopworn inventories. Floor – deters understatement of inventory and overstatement of the loss in the current period. Lower-of-Cost-or-Market Rationale for Limitations
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Chapter 9-6 Lower-of-Cost-or-Market How LCM Works (Individual Items) Illustration 9-5 Solution on notes page
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Chapter 9-7 Lower-of-Cost-or-Market Methods of Applying LCM Illustration 9-6 Solution on notes page
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Chapter 9-8 Lower-of-Cost-or-Market Recording LCM (data from Illus. 9-5 and 9-6) Ending inventory (cost) $ 415,000 Ending inventory (LCM) 350,000 Adjustment to LCM $ 65,000 Allowance on inventory 65,000 Loss on inventory 65,000 Inventory 65,000 Cost of goods sold 65,000 Allowance Method Direct Method
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Chapter 9-9 Allowance Direct Current assets: Cash 100, 000 $ Accounts receivable 350, 000 I nventory 770, 000 705, 000 Less: inventory allowance (65, 000) Prepaids 20, 000 Total current assets 1, 175, 000 Lower-of-Cost-or-Market Balance Sheet Presentation
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Chapter 9-10 Allowance Direct Sales 300,000 $ 300,000 Cost of goods sold 120,000 185,000 Gross profit 180,000 115,000 Operating expenses: Selling 45,000 45,000 General and administrative 20,000 20,000 Total operating expenses 65,000 65,000 Other revenue and expense: Loss on inventory - I nterest income 5,000 5,000 Total other (60,000) I ncome from operations 55,000 55,000 I ncome tax expense 16,500 16,500 Net income 38,500 38,500 Lower-of-Cost-or-Market Income Statement Presentation
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Chapter 9-11 P9-1: KC Company manufactures desks. The company attempts to obtain a 20% gross margin on selling price. At December 31, 2010, the following finished desks appear in the company’s inventory. Instructions: At what amount should the desks appear in the company’s December 31, 2010, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-market approach for valuation of inventories on an individual-item basis? Finished Desks A B C D I nventory cost 470 $ 450 $ 830 $ 960 $ Est. cost to manufacture 460 430 610 1,000 Commissions and disposal costs 50 60 80 130 Catalog selling price 500 540 900 1,200 Lower-of-Cost-or-Market
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Kieso_Inter_13e_Ch09 - CHAPTER 9 INVENTORIES: INVENTORIES:...

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