Kieso9 - ACCT311 Lecture Notes Inventory Part 2 Chapter 9...

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ACCT311 Lecture Notes Inventory Part 2 Chapter 9 Inventory - Special Valuation Issues Predictive Value of Balance Sheet Information How does an intelligent reader look at the balance sheet? Cash – available for business or owners Accounts Receivable – cash with risk of collection Prepaid expenses – future expense (tax deduction) Fixed Assets – business continuity Investments – better long-term return than investors could earn? Inventory – future profit (cash flow) If historical gross profit margin = 60% and tax rate is 40% Inventory valued at $100 million represents future cash flow of $250 million pretax, and $190 million after taxes. Remember inventory is already paid for or otherwise provided for in working capital. The future use of the inventory is sales which generates cash. Adjusting Inventory to the Lower of Cost or Market (“LCM”) Why? Predictive Value and Matching principle. Cost of inventory normally becomes expense in the period sold (matched to revenue). Where there is evidence that the future use of inventory will yield less than the
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Kieso9 - ACCT311 Lecture Notes Inventory Part 2 Chapter 9...

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