ch09 - 9-1Intermediate Accounting14th Edition9Inventories:...

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Unformatted text preview: 9-1Intermediate Accounting14th Edition9Inventories: Additional Valuation IssuesKieso, Weygandt, and Warfield9-21.Describe and apply the lower-of-cost-or-net realizable value 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 ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives9-3Market = Replacement CostLower of Cost or Replacement CostLoss should be recorded when loss occurs, not in the period of sale.The value of inventory can change for many reasons (e.g. changes in demand/prices, obsolescence, damage, etc.)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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.9-4Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1Illustration 9-19-5Replacement cost is the cost to purchase/produce a particular inventory itemDecline 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 andFloor - net realizable value less a normal profit margin.Why use Replacement Cost (RC) for Market?Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.9-6Net realizable value (NRV) is the is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal (often referred to as net selling price). A normal profit margin is deducted to determine the floor.Illustration 9-2Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.CeilingCeilingFloorFloor9-7If replacement cost fails to indicate the decline in the revenue-producing ability of the productCeiling 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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule....
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ch09 - 9-1Intermediate Accounting14th Edition9Inventories:...

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