ch09_ins NIU S11 stu - CHAPTER 9 INVENTORIES: ADDITIONAL...

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Click to edit Master subtitle style C H A P T E R 9 INVENTORIES: ADDITIONAL VALUATION ISSUES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield
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1. Describe and apply the lower-of-cost-or-market rule. 2. Explain when companies value inventories at net realizable value. 3. Explain when companies use the relative sales value method to value inventories. 4. Discuss accounting issues related to purchase commitments. 5. Determine ending inventory by applying the gross profit method. 6. Determine ending inventory by applying the retail inventory method. 7. Explain how to report and analyze inventory. Learning Objectives
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Net realizable value Relative sales value Purchase commitments Lower-of- Cost-or- Market Valuation Bases Gross Profit Method Retail Inventory Method Presentation and Analysis Ceiling and floor How LCM works Application of LCM “Market” Evaluation of rule Gross profit percentage Evaluation of method Concepts Conventional method Special items Evaluation of method Presentation Analysis Inventories: Additional Valuation Issues
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Lower of Cost or GAAP requires that inventories be carried at cost or current market value, whichever is lower. LCM is a departure from historical cost and is a conservative accounting method.
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The Market Value The term " market " in the LCM rule means the cost to replace the item by purchase or reproduction. (a measurement of entry value) The market amount is limited by ceiling (upper) and floor (lower) restrictions that are based on measurements of exit value.
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Click to edit Master subtitle style Determining Market Value Net Realizable Value ( Ceiling ) Net Realizable Value less NormalProfit (Floor) Net Realizable Value (NRV) is the estimated selling price less cost of completion and disposal. Replacement Cost If replacement cost > Ceiling, then _________ = Market Value If replacement cost < Floor, then _________ = Market Value
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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 LO 1 Describe and apply the lower-of-cost-or-market rule. Rationale for Limitations
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Exercise XYZ company has unfinished inventory with a sales value of $1,000, estimated cost of completion of $300, and a normal profit margin of 10% of sales. Inventory (at selling price) $1,000 Less: estimated cost of completion and disposal 300 Net realizable value (net selling price) 700 Less: a normal profit margin (10% of sales) 100 Net realizable value less a normal profit margin 600
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Step 2: get the lower of the cost or market value Step 1: get the middle of the ceiling, floor and replacement costs (designated market value) Exercise
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Apply LCM The LCM rule may be applied: (a) directly to each item or (b) to the total of the inventory or (c) in some cases, to the total of the components of each major category.
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ch09_ins NIU S11 stu - CHAPTER 9 INVENTORIES: ADDITIONAL...

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