ch09 - Learning Objectives Learning Objectives 1 2 3 4 5...

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9-1 1. 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 Objectives Learning Objectives Learning Objectives Learning Objectives
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9-2 Market = Replacement Cost Lower of Cost or Replacement Cost 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 Lower-of-Cost-or-Market Lower-of-Cost-or-Market Lower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
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9-3 Decline 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 and Floor - net realizable value less a normal profit margin. Why use Replacement Cost (RC) for Market? Lower-of-Cost-or-Market Lower-of-Cost-or-Market Lower-of-Cost-or-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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9-4 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 Lower-of-Cost-or-Market Lower-of-Cost-or-Market Lower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
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9-5 Not Not < Cost Cost Market Market Ceiling = NRV Ceiling = NRV Replacement Cost Replacement Cost Floor = NRV less Normal Profit Margin Floor = NRV less Normal Profit Margin GAAP LCM GAAP LCM What is the rationale for the Ceiling and Floor limitations? Lower-of-Cost-or-Market Lower-of-Cost-or-Market Lower-of-Cost-or-Market Lower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Not Not > Illustration 9-3
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9-6 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 Lower-of-Cost-or-Market Lower-of-Cost-or-Market Lower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Limitations
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9-7 LO 1 Describe and apply the lower-of-cost-or-market rule. Lower-of-Cost-or-Market Lower-of-Cost-or-Market Lower-of-Cost-or-Market 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 Loss Method COGS Method COGS Method Recording “Market” Instead of Cost
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