Chap009 - Chapter 09 - Inventories: Additional Issues...

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Chapter 09 - Inventories: Additional Issues 9-1 Chapter 9 Inventories: Additional Issues QUESTIONS FOR REVIEW OF KEY TOPICS Question 9-1 Question 9-2 Question 9-4 Question 9-6 The key to obtaining accurate estimates when using the gross profit method is the reliability of the cost percentage. If the cost percentage is too low, cost of goods sold will be understated and ending inventory overstated. Cost percentages usually are based on relationships of past years, which aren’t necessarily representative of the current relationship. Failure to consider theft or spoilage also could cause an overstatement of ending inventory. Question 9-11 The lower-of-cost-or-market (LCM) retail variation combined with the average cost method is called the conventional retail method. The LCM rule is incorporated into the retail inventory estimation procedure by excluding markdowns from the calculation of the cost-to-retail percentage. Question 9-12 When applying LIFO, if inventory increases during the year, none of the beginning inventory is assumed sold. Ending inventory includes the beginning inventory plus the current year’s layer. To GAAP generally require the use of historical cost to value assets, but a departure from cost is necessary when the utility of an asset is no longer as great as its cost. The utility or benefits from inventory result from the ultimate sale of the goods. This utility could be reduced below cost due to deterioration, obsolescence, or changes in price levels. To avoid reporting inventory at an amount greater than the benefits it can provide, the lower-of-cost-or-market approach to valuing inventory was developed. This approach results in the recognition of losses when the value of inventory declines below its cost, rather than in the period in which the goods are ultimately sold. The designated market value in the LCM rule is the middle number of replacement cost (RC), net realizable value (NRV) and net realizable value less a normal profit margin (NRV-NP). This is the amount compared with cost to determine LCM. The preferred method is to record the loss from the write-down of inventory as a separate item in the income statement rather than including the write-down in cost of goods sold. A less desirable alternative is to include the loss in cost of goods sold.
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Chapter 09 - Inventories: Additional Issues 9-2 determine layers, we compare ending inventory at retail to beginning inventory at retail and assume that no more than one inventory layer is added if inventory increases. Each layer carries its own cost-to-retail percentage that is used to convert each layer from retail to cost. Answers to Questions (continued) Question 9-13 Freight-in is added to purchases in the cost column. Net markups are added in the retail column before the calculation of the cost-to-retail percentage. Normal spoilage is deducted in the retail column after the calculation of the cost-to-retail percentage. If sales are recorded net of employee discounts, the discounts are deducted in the retail column. Question 9-14
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This note was uploaded on 03/12/2011 for the course ACCT 3110 taught by Professor Cutler during the Spring '08 term at North Texas.

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Chap009 - Chapter 09 - Inventories: Additional Issues...

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