Damaged obsolete and deteriorated items are recorded

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Damaged, obsolete, and deteriorated items are recorded at their net realizable value(selling price less selling cost).The reduction in inventory value is expensed under cost of goods sold.32 / 59
17Lower of cost or market (LCM), illustration:Tesla 2013 10K – Note 2: Summary of significant accounting policies:We record inventory write-downs based on reviews for excess and obsolescence determined primarily by future demand forecasts. We also adjust the carrying value of our inventories when we believe that the net realizable value is less than the carrying value. These write-downs are measured as the difference between the cost of the inventory, including estimated costs to complete, and estimated selling prices. Once inventory is written down, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.”33 / 59Lower of cost or market (LCM), example:Apple Inc. manufactures and sells iPhones, iPads, and MacBooks. The table below provides relevant information for Apple’s inventory as of December 31, 2014:Required:Calculate Apple’s inventory balance on December 31, 2014.DescriptionUnitsUnit CostReplacement CostiPhone 610,000300250iPad Air 27,000600500MacBook Pro2,00080095034 / 59
18Lower of cost or market (LCM), solution:*10,000*250= 2,500,000** 7,000*500 = 3,500,000*** 2,000*800 = 1,600,000Total Inventory = 7,600,000 = 2.5M + 3.5M + 1.6M35 / 59UnitsUnitCostMarketLower cost or marketTotal ValueiPhone 610,0003002502502,500,000*iPad Air 27,0006005005003,500,000**MacBook Pro2,0008009508001,600,000***Total19,0007,600,000Practice E7-11:Jones Company is preparing the annual financial statements dated December 31, 2015. Ending inventory information about the five major items stocked for regular sale follows:Required:Compute the valuation that should be used for the 2015 ending inventory using the LCM rule applied on an item-by-item basis. (Hint:Set up columns for Item, Quantity, Total Cost, Total Market, and LCM Valuation.)36 / 59
19Solution to E7-11: 37 / 59ItemQuantityFIFO costMarketLCMValueA501512B803040C104852D702530E350105Total560• Inventory: The biggest inventory write-off in history:Cisco Systems:April 17, 2001: The company announces a $2.25 billion inventory write-off.38 / 59
20Converting LIFO into FIFO:• Why?– FIFO is the “balance sheet” approach Balance sheet is more relevant.– GAAP has a preference for the balance sheet approach.• How?– When firms use LIFO, they are required to disclose the LIFO reserve.LIFO reserve = FIFO Inventory – LIFO InventoryFIFO inventory = LIFO Inventory + LIFO Reserve39 / 59Converting LIFO into FIFO:40 / 59FIFO Inventory = LIFO Inventory + LIFO ReserveFIFO COGS = B.B. FIFO Inventory+ Purchases– E.B. FIFO InventoryFIFO COGS = (B.B. LIFO Inventory + B.B. LIFO Reserve)+ Purchases– (E.B. LIFO Inventory + E.B. LIFO Reserve)FIFO COGS = B.B. LIFO Inventory + Purchases – E.B. LIFO Inventory– [E.B. LIFO Reserve –B.B. LIFO Reserve]FIFO COGS = LIFO COGS – Change in LIFO ReserveFIFO Gross Profit = Revenues – FIFO COGSLIFO COGSChange in LIFO Reserve
21Converting LIFO into FIFO:LIFO reserve = FIFO Inventory – LIFO InventoryFIFO inventory = LIFO Inventory + LIFO ReserveFIFO COGS = LIFO COGS - Change in LIFO ReserveFIFO Gross Profit = Revenues – FIFO COGSChange in LIFO reserve = LIFO reserve end of year – LIFO reserve beginning of year41 / 59LIFO Inventory, illustration:Ford Motors 2013 10K, Note 9 – Inventory:

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