ch09s - Chapter 9 Inventories: Additional Valuation Issues...

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Chapter 9 Inventories: Additional Valuation Issues
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Chapter 9: Key Concepts Review Lower-of-Cost-or-Market (LCM). Discuss Valuation Bases. Discuss Alternative Inventory Estimation Techniques. Gross Profit and Retail Inventory Methods. Review the Financial Statement Presentation of Inventory. 2 Accounting 301A-Eiler
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Lower-of-Cost-or-Market (LCM) FASB ASC 330-10-35-1 States: “Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period . This is generally accomplished by stating such goods at a lower level commonly designated as market.” Accounting 301A-Eiler 3
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Lower-of-Cost-or-Market (LCM) When the future potential of the inventory is less than its cost, it must be written down. Implicit assumption is that decline in market price means decline in revenues. LCM is an exception to historical cost principle. Which Principle does LCM Relate to? Conservatism . What if there is a subsequent increase in inventory value? US GAAP prohibits the reversal of writedowns. This is supported by the SEC (ASC 310-10-S99-2). Accounting 301A-Eiler 4
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LCM: Ceiling and Floor Market value is the replacement cost (RC). Designated Market Value must lie between a Ceiling amount and a Floor amount. Ceiling = Net Realizable Value (Selling Price – Disposal Cost). Floor = Net Realizable Value - Normal Profit Margin. Choose the Middle One: RC, Floor, or Ceiling. Accounting 301A-Eiler 5
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LCM: Ceiling and Floor Ceiling: Net Realizable Value = Selling Price – Selling Cost. Floor: Net Realizable Value - Normal Profit Margin. 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. Accounting 301A-Eiler 6
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LCM: Ceiling and Floor Accounting 301A-Eiler 7 Not < Cost Market Ceiling = NRV Replacement Cost Floor = NRV less Normal Profit Margin GAAP LCM Not >
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Example: LCM Ceiling and Floor Ite m Historic al Cost Repl. Cost (RC) Ceiling Floor Desig. Market Value Cost >Mk t? Final Inventor y A 80,000 88,000 120,000 104,000 104,000 N 80,000 B 90,000 88,000 100,000 70,000 88,000 Y 88,000 C 90,000 88,000 100,000 91,000 91,000 N 90,000 D 90,000 88,000 87,000 70,000 87,000 Y 90,000 Accounting 301A-Eiler 8 Practice Problem…
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This note was uploaded on 11/08/2011 for the course ECON 102 taught by Professor Smith during the Spring '11 term at Saddleback.

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ch09s - Chapter 9 Inventories: Additional Valuation Issues...

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