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Chapter 9 - Inventories Additional Issues Anthony A Meder...

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Inventories: Additional Issues Anthony A. Meder, Ph.D. Oct. 31, Nov. 1 2011
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Additional inventory valuations Lower of cost or market rule (LCM) Estimating ending inventory Gross Profit method Retail Method Accounting for changes in inventory method Accounting for inventory errors US GAAP vs. IFRS related to LCM
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Lower of Cost or Market Originally at historical cost, but if potential benefit of inventory drops to < its cost, an adjustment needs to be made. Many reasons for drop, including Obsolence Deterioration Price levels change To report at LCM Determine a market value Apply the LCM
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Determine Market Value US GAAP Market Value – Replacement Cost (RC) Restrictions Do not use a Market value > Net Realizable Value (NRV) Do not use a Market value < NRV – Normal Profit (NP) So, market value used is the MIDDLE of 3 values… RC, NRV and (NRV-NP) NRV= Normal selling price less predictable costs of completion and disposal
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Why replacement cost? Usually a good indicator of trend in selling price as well. Also, revaluing inventory at RC means the profit margin on that older inventory is likely closer to the profit margin that would be realized on new inventory The NRV and NRV-NP prevent over- adjustment of the inventory value
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Applying LCM Can apply by Individual inventory items Logical inventory groups (by product line, typically) Inventory as a whole
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Adjusting Cost to Market Once we have determined a Cost and a Market price, we compare.
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