Chap009_PPT - Ch 9 Inventories Additional Issues Initially...

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9 - 1 Ch 9 Inventories: Additional Issues Initially, inventory items are recorded at their historical costs, but a departure from cost is warranted when the utility of an asset (the probable future economic benefits) is no longer as great as its cost. Deterioration, obsolescence, changes in price levels, or any situation that might comprise the inventory’s salability causes us to use a measure of lower-of-cost-or-market.
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9 - 2 Reporting -- Lower of Cost or Market Inventories are valued at the lower-of-cost-or market. LCM is a departure from historical cost . Losses will be recognized when the value of inventory declines below its cost. LCM is a departure from historical cost . Losses will be recognized when the value of inventory declines below its cost.
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9 - 3 Reporting -- Lower of Cost or Market X Inc., has 1,000 units of following products in the ending inventory: Product A Product B $/unit $/unit Cost 50 30 Replacement Cost 48 26 Selling Price 70 36 Disposal Costs 6 4 Normal Profit Margin 10 8 * Replacement Cost – the cost to replace the item by purchase or manufacture
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9 - 4 1 2 3 4 5 Product Replace- ment Cost (RC) Ceiling NRV (*) Floor NRV-NP (**) Designated Market Value [Middle value of (1), (2) & (3)] Cost Per Unit Inventory Value [Lower of (4) and (5)] A 48 64 54 54 50 50 B 26 32 24 26 30 26 * Selling price less disposal costs. ** NRV less normal profit margin Under US GAAP
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9 - 5 Cost LCM Product 1 (1,000 units) $50,000 $50,000 Product 2 (1,000 units) 30,000 26,000 Cost $80,000 LCM value $76,000 Before-tax income will be lower by $4,000 , the amount of the required inventory write-down. Loss on write-down of inventory (*) 4,000 Inventory 4,000 * or debit to Cost of goods sold
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9 - 6 Under IFRS Product Cost NRV* LCM A 50 64 50 B 30 32 30 * NRV = Selling price less disposal costs. Because cost is lower than market for both products, no LCM adjustment is required. The inventory is valued at its cost of $80,000, determined as follows: Product 1 (1,000 units) $50,000 Product 2 (1,000 units) 30,000 Cost $80,000
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9 - 7 Applying Lower of Cost or Market Lower of cost or market can be applied In 3 different ways.
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9 - 8 Apply lower-of-cost-or-market in 3 ways Market Individual Product Entire Item Cost Value Items Line Inventory A 50 65 50 B 100 90 90 Total A + B 150 155 150 C 80 65 65 D 90 56 56 E 95 86 86 Total C+D+E 265 207 207 Total 415 362 347 357 362 Lower of Cost or Market
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9 - 9 U. S. GAAP vs. IFRS LCM requires selecting market from replacement cost, net realizable value or NRV reduced by the normal profit margin. Designated market is compared to historical cost to determine LCM. International standards require inventory to be valued at the lower of cost or market, but the process is slightly different for the U.S. method of applying LCM. IAS No. 2, states that the designated market will always be net realizable value.
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9 - 10 U. S. GAAP vs. IFRS Under U.S. GAAP, the LCM rule can be applied to individual items, logical inventory categories, or the entire inventory.
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