Chap9 - Inventories Additional Valuation Issues(for Tues 12...

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Inventories: Additional Valuation Issues (for Tues 12 and Thur 14)
Learning Objectives 1.Describe and apply the lower-of-cost-or-net realizable value rule. 2.Explain when companies value inventories at net realizable value. 3.Explain when companies use the relative sales value method to value inventories. 4.Discuss accounting issues related to purchase commitments. 5.Determine ending inventory by applying the gross profit method. 6.Determine ending inventory by applying the retail inventory method. 7.Explain how to report and analyze inventory.
Inventories: Additional Valuation Issues Net realizable value Relative sales value Purchase commitments Lower-of-Cost-or-Market Valuation Bases Gross Profit Method Retail Inventory Method Presentation and Analysis Ceiling and floor How LCM works Application of LCM “Market”Use of an allowance Multiple periods Evaluation of rule Gross profit percentage Evaluation of method Concepts Conventional method Special items Evaluation of method Presentation Analysis
Market = Replacement Cost Lower of Cost or Replacement Cost LO 1 Describe and apply the lower-of-cost-or-market rule.
Lower-of-Cost-or-Market LO 1 Illustration 9-1
Lower-of-Cost-or-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 and Floor - net realizable value less a normal profit margin. Why use Replacement Cost (RC) for Market? LO 1 Describe and apply the lower-of-cost-or-market rule. Ceiling and Floor
Illustration 9-2 LO 1 Describe and apply the lower-of-cost-or-market rule.
Lower-of-Cost-or-Market
=
LCM What is the rationale for the Ceiling and Floor limitations?

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