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ch09 student - Chapter 9 Inventories Additional Valuation...

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Chapter 9: Inventories: Additional Valuation Issues
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u Market = Replacement Cost u Lower of Cost or Replacement Cost u Loss should be recorded when loss occurs, 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.
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Lower-of-Cost-or-Market LO 1 Illustration 9-1
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u Decline in the RC usually = decline in selling price. u RC allows a consistent rate of gross profit. u 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
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Net 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). Illustration 9-2 Lower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
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Not < Cost Market Ceiling = NRV 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
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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. Limitations
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Lower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. How LCM Works (Individual Items) Illustration 9-5
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Lower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Methods of Applying LCM Illustration 9-6
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LO 1 Describe and apply the lower-of-cost-or-market rule. Lower-of-Cost-or-Market Ending inventory (cost) $ 82,000 Ending inventory (market) 70,000 Adjustment to LCM $ 12,000 Allowance to reduce inventory 12,000 Loss due to decline in inventory 12,000 Inventory 12,000 Cost of goods sold 12,000 Loss Method COGS Method Recording “Market” Instead of Cost
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Loss COGS Method Method Current assets: Cash 100,000 $ 100,000 $ Accounts receivable 350,000 350,000 Inventory 770,000 (758,000) Less: inventory allowance (12,000) Prepaids 20,000 20,000 Total current assets 1,175,000 1,175,000 LO 1 Describe and apply the lower-of-cost-or-market rule. Lower-of-Cost-or-Market Balance Sheet Presentation
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Loss COGS Method Method Sales 300,000 $ 300,000 $ Cost of goods sold 120,000 132,000 Gross profit 180,000 168,000 Operating expenses: Selling 45,000 45,000 General and administrative 20,000 20,000 Total operating expenses 65,000 65,000 Other revenue and (expense): Loss on inventory (12,000) - Interest income 5,000 5,000 Total other (7,000) 5,000 Income from operations 108,000 108,000 Income tax expense 32,400 32,400 Net income 75,600 $ 75,600 $ LO 1 Lower-of-Cost-or-Market Income Statement Presentation
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P9-1 : Remmers Company manufactures desks. The company attempts to obtain a 20% gross margin on selling price. At December 31, 2012, the
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