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

Unformatted text preview: 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 ¢ 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 ¢ 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 > Il ustration 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....
View Full Document