{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

acct 3001 ch 9 - CHAPTER9INVENTORIES:PARTII 1 2 3 4...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 9 – INVENTORIES: PART II 1. Lower of Cost or Market 2. Valuation Bases 3. Gross Profit Method 4. Presentation and Analysis 1. Lower of Cost or Market (LCM) A company abandons the historical cost principle when the future utility (revenue- producing ability) of the asset drops below its original cost. Market = Replacement Cost Lower of Cost or Replacement Cost Loss should be recorded when loss occurs, not in the period of sale.  (Conservatism) – given a choice between two accounting methods, choose the  one that understates assets (and earnings) and overstates liabilities (and losses). Ceiling and Floor Why use Replacement Cost (RC) for Market? Decline in the RC usually = decline in selling price. RC allows a consistent rate of gross profit. If reduction in RC fails to indicate reduction in utility, then two additional  valuation limitations are used:  Ceiling - net realizable value (defined as estimated selling price of  inventory less normal selling costs, (completion costs and disposal costs)  and Floor - net realizable value less a normal profit margin.
Image of page 1

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

View Full Document Right Arrow Icon
CHAPTER 9 – INVENTORIES: PART II What is the rationale for Ceiling and Floor limitations? Rationale for Limits: 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.
Image of page 2
CHAPTER 9 – INVENTORIES: PART II
Image of page 3

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

View Full Document Right Arrow Icon
CHAPTER 9 – INVENTORIES: PART II Class Example – Lower of Cost or Market Brown Company carries four items in inventory.  The following data is available about the items in inventory  as of December 31, 2004.  Determine the proper inventory value using the lower-of-cost-or-market method on (a)  an item-by-item basis and (b) a total inventory basis.  In each instance, make any necessary journal entries. Item Number Of Units Historica l Cost Replacemen t Cost Estimated Selling Price Estimated Selling Costs Profit Margin (as a % of sales) T-shirts 150 $15 $16 $20 $3 15% Shorts 200 9 5 10 2 10% Socks 100 18 21 30 4 20% Pants 125 30 28 40 5 25%
Image of page 4
CHAPTER 9 – INVENTORIES: PART II Balance Sheet Presentation Allowance Direct Current Assets: Cash $100,000 $100,000 Accounts Receivable 350,000 350,000 Inventory 770,000 705,000 Less: inventory Allowance (65,000) Prepaid expense 20,000 20,000 Total current assets $1,175,000 $1,175,000 Income Statement Presentation Allowance Direct Sales $300,000 $300,000 Cost of goods sold 120,000 185,000 Gross profit 180,000 115,000 Operating expenses: Selling 45,000 45,000 General and administrative 20,000 20,000 Total operating expenses 65,000 65,000 Other revenue and expenses: Loss on inventory 65,000 Interest income 5,000 5,000
Image of page 5

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

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern