ch09 student - Chapter 9: Inventories: Additional Valuation...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 9: Inventories: Additional Valuation Issues 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. Lower-of-Cost-or-Market LO 1 Illustration 9-1 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 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. 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 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 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 Lower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Methods of Applying LCM Illustration 9-6 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 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 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...
View Full Document

This note was uploaded on 03/01/2012 for the course FIN 3154 taught by Professor Jceasterwood during the Spring '08 term at Virginia Tech.

Page1 / 65

ch09 student - Chapter 9: Inventories: Additional Valuation...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online