Inventories: Additional Issues

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Inventories: Additional Issues

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1. Inventories: Additional Issues CHAPTER 9

2. Lower of Cost or Market (LCM)

3. Determining Market Value

4. Determining Market Value

5. Lower of Cost or Market - Example An item in inventory is currently carried at historical cost of $20 per unit. At year-end we gather the following per unit information: current replacement cost = $21.50; selling price = $30; cost to complete and dispose = $4; and normal profit margin of = $5. How would we value this item on the Balance Sheet?

6. Lower of Cost or Market - Example

7. Lower of Cost or Market - Example

8. Lower of Cost or Market Another Example An inventory item is currently carried at historical cost of $95.00 per unit. At the Balance Sheet date we gather the following per unit information: current replacement cost = $90.00; NRV = $100.00; and NRV reduced by normal profit = $70.00. How would we value the item on our Balance Sheet?

9. Lower of Cost or Market Another Example

10. Lower of Cost or Market Another Example

11. Applying LCM

12. Adjusting Cost to Market Direct Inventory Reduction Method Record and report inventory holding loss each accounting period. Inventory Allowance Method Record holding loss in a contra-inventory account.

13. Inventory Estimation Techniques Taking physical inventory is costly and time consuming, so it is sometimes necessary to estimate the cost of ending inventory. Two popular methods are . . . Gross Profit Method Retail Inventory Method

14. Gross Profit Method

15. Gross Profit Method

16. Gross Profit Method Estimate historical Gross Margin %. Sales x (1 - Estimated Gross Margin %) = Estimated COGS Beg. Inventory + Net Purchases = Cost of Goods Available for Sale (COGAS) COGAS - COGS = Estimated Cost of Ending Inventory

17. Gross Profit Method - Example

18. Gross Profit Method - Example

19. Retail Inventory Method This method was developed for retail operations like department stores. Uses both the retail value and cost of items for sale to calculate a cost to retail ratio. Convert ending inventory at retail to ending inventory at cost.

20. Retail Inventory Method

21. Retail Inventory Method Determine cost and retail value of goods sold. Calculate the cost-to-retail % Retail value of goods available for sale - sales = ending inventory at retail. Cost-to-retail % x Ending inventory at retail = Estimated ending inventory at cost.

22. Retail Inventory Method - Example

23. Retail Inventory Method

24. Approximating Average Cost Approximating Average Cost

25. Retail Inventory Method Average Cost Example

26. Retail Inventory Method Average Cost Example

27. Retail Method - Average Cost LCM Approximating Average LCM

28. Retail Method - Average Cost LCM Example

29. Retail Method - Average Cost LCM Example

30. The LIFO Retail Method Assume that retail prices of goods remain stable during the period. Establish a LIFO base layer (beginning inventory) and add (or subtract) the layer from the current period. Calculate the cost-to-retail percentage for beginning inventory and for adjusted net purchases for the period.

31. The LIFO Retail Method

32. The LIFO Retail Method Use the data from Webb Inc. to estimate the LIFO ending inventory. Beginning inventory at cost $21,000, at retail $35,000; Net purchases at cost $200,000, at retail $304,000; Net markups $8,000; Net markdowns $4,000; Net sales for June $300,000. Estimate ending inventory.

33. The LIFO Retail Method

34. Others Issues of Retail Method Purchase returns and purchase discounts. Freight-in. Employee discounts. Spoilage, breakage, and theft.

35. Dollar-Value LIFO Retail We need to eliminate the effect of any price changes before we compare the ending inventory with the beginning inventory.

36. Dollar-Value LIFO Retail

37. Dollar-Value LIFO Retail

38. Changes in Inventory Method Changes not involving LIFO Report the cumulative effect of the change, net of tax, on the current income statement. Changes to LIFO from other methods Usually impossible to determine the cumulative effect. Changes from LIFO to other methods Retroactively restate financial statements for each year reported.

39. Inventory Errors Overstatement of ending inventory Understates cost of goods sold and Overstates pretax income. Understatement of ending inventory Overstates cost of goods sold and Understates pretax income.

40. Inventory Errors Overstatement of beginning inventory Overstates cost of goods sold and Understates pretax income. Understatement of beginning inventory Understates cost of goods sold and Overstates pretax income.

41. Inventory Errors Overstatement of purchases Overstates cost of goods sold and Understates pretax income. Understatement of purchases Understates cost of goods sold and Overstates pretax income.

42. End of Chapter 9

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