ch09 - 9-11.Describe and apply the lower-of-cost-or-net...

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Unformatted text preview: 9-11.Describe and apply the lower-of-cost-or-net realizable value rule.2.Relative sales value method to value inventories.3.Accounting issues related to purchase commitments.4.Determine ending inventory by applying the gross profit method.5.Reporting and analyzing inventory.Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives9-2Market = Replacement CostLower of Cost or Replacement CostLoss should be recorded when loss occurs, not in the period of sale.A companyabandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost.Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.9-3Decline in the RC usually decline in selling price.RC allows a consistent rate of gross profit.If reduction in RC fails to fully capture the reduction in utility, then two additional valuation limitations are used: Ceiling - net realizable value andFloor - net realizable value less a normal profit margin.Why use Replacement Cost (RC) for Market?Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.Ceiling and Floor9-4Net 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 9-2Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.9-5NotNot<CostCostMarketMarketCeiling = NRVCeiling= NRVReplacementCostReplacementCostFloor =NRV less NormalProfit MarginFloor=NRV less NormalProfit MarginGAAPLCMGAAPLCMWhat is the rationale for theCeilingandFloorlimitations?Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.NotNot>Illustration 9-39-6Ceiling 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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.Limitations9-7LO 1 Describe and apply the lower-of-cost-or-market rule.Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketEnding inventory (cost) $ 82,000 Ending inventory (market)70,000Adjustment to LCM $ 12,000Allowance to reduce inventory 12,000Loss due to decline in inventory12,000Inventory 12,000Cost of goods sold12,000Loss MethodLoss MethodCOGSMethodCOGSMethodRecording Market Instead of Cost9-8LossCOGSMethodMethodCurrent assets:Cash100,000$ 100,000$...
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ch09 - 9-11.Describe and apply the lower-of-cost-or-net...

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