INVENTORY-II-Chap009

INVENTORY-II-Chap009 - Reporting Lower of Cost or Market Inventories are valued at the lowerof-cost-or market LCM is a departure from historical

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9 - 1 Reporting -- Lower of Cost or Market Inventories are valued at the lower- of-cost-or market. LCM is a departure from historical cost . The method causes losses to be recognized in the period the value of inventory declines below its cost rather than in the period that the goods ultimately are sold.
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9 - 2 VALUING INVENTORY AT MARKET LCM
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9 - 3 Determining Market Value Market Should Not Exceed Net Realizable Value ( Ceiling ) Market Should Not Be Less Than Net Realizable Value less Normal Profit ( Floor ) GAAP defines GAAP defines “market value” in “market value” in terms of current terms of current replacement cost. replacement cost. Market should not be Market should not be greater than the greater than the “ceiling” or less than “ceiling” or less than the “floor.” the “floor.”
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9 - 4 Determining Market Value Ceiling Ceiling NRV NRV Replacement Replacement Cost Cost NRV – NP NRV – NP Floor Floor Designated Designated Market Market Cost Cost Not More Than Not Less Than Or Step 1 Determine Designated Market Step 2 Compare Designated Market with Cost Lower of Cost Lower of Cost Or Market Or Market
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9 - 5 Lower of Cost or Market An item in inventory has a historical cost of $20 per unit. At year-end we gather the following per unit information: current replacement cost = $21.50 selling price = $30 cost to complete and dispose = $4 normal profit margin of = $5 How would we value this item in the Balance Sheet?
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9 - 6 Lower of Cost or Market Replacement Cost =$21.50 $21.50 Designated Market? Historical cost of $20.00 is Historical cost of $20.00 is less than designated less than designated market of $21.50, so this market of $21.50, so this inventory item will be inventory item will be valued at cost of $20.00. valued at cost of $20.00.
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9 - 7 1. Apply LCM to 1. Apply LCM to each individual item each individual item in in inventory. inventory. 2. Apply LCM to logical inventory categories . 3. Apply LCM to the entire inventory as a group. Applying Lower of Cost or Market Lower of cost or market can be applied 3 different ways.
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9 - 8 Adjusting Cost to Market 1. Record the Loss as a Separate Item in the Income Statement Loss on write-down of inventory XX Inventory XX 1. Record the Loss as part of Cost of Goods Sold. Cost of goods sold XX Inventory XX
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9 - 9 U. S. GAAP vs. IFRS LCM requires selecting market from replacement cost, net realizable value or NRV reduced by the normal profit margin. Designated market is compared to historical cost to determine LCM. IAS No. 2, states that the designated market will always be net realizable value. International standards require inventory to be valued at the lower of cost or market, but the process is slightly different for the U.S. method of applying LCM.
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9 - 10 U. S. GAAP vs. IFRS Under U.S. GAAP, the LCM rule can be applied to individual items, logical inventory categories, or the entire inventory. Reversals are not permitted
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This note was uploaded on 04/04/2011 for the course ACC 615 taught by Professor Semir during the Spring '11 term at Pace.

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INVENTORY-II-Chap009 - Reporting Lower of Cost or Market Inventories are valued at the lowerof-cost-or market LCM is a departure from historical

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