CH 9 - Chapter 9 Inventories Additional Valuation Issues...

Chapter 9 – Inventories:
Additional Valuation Issues
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Copyright Protected
Chapter
9-2
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
Chapter
9-3
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 ²
Evaluation of
rule
Gross profit
percentage
Evaluation of
method
Concepts
Conventional
method
Special items
Evaluation of
method
Presentation
Analysis
Inventories: Additional Valuation Issues

Chapter
9-4
Market = Calculated Replacement Cost per GAAP
GAAP requires the use of ± Designated Market Value DMV ²
Lower of Cost or Replacement Cost
Loss should be recorded when loss occurs (when identified) ,
not in the period of sale.
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-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
LCM Considerations:
Chapter
9-5
Not
<
Cost Market
Ceiling = NRV
(Sales-Selling Costs)
Replacement
Cost
Floor =
NRV less Normal
Profit Margin
GAAP
LCM
What is the rationale for the
Ceiling and Floor limitations?
Lower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Not
>
Illustration 9-3
Chapter
9-6
Designated Market Value DMV
!
DMV is the $ amount compared to cost
!
Always the middle value/amount of three values :
replacement cost ( RC ); net realizable value
( NRV ); and ( Floor ) net realizable value less a
normal profit margin ( NRV-NP )
!
See Illustration 9-4 ( DMV $ - middle amount)
RC NRV Floor NRV-NP
Spinach $88 $120 $ 104
Carrots 90 100 70
Peas 36 72 48

Chapter
9-7
Decline 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 and
"
Floor - net realizable value less a normal profit margin.
Why use Replacement Cost (RC) for Market?
Lower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Ceiling and Floor
Chapter
9-8
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.