9-1 prepared by coby harmon university of california, santa barbara intermediate accounting

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  • Slide 1
  • 9-1 Prepared by Coby Harmon University of California, Santa Barbara Intermediate Accounting
  • Slide 2
  • 9-2 Intermediate Accounting 14th Edition 9 Inventories: Additional Valuation Issues Kieso, Weygandt, and Warfield
  • Slide 3
  • 9-3 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 Inventories: Additional Valuation Issues
  • Slide 4
  • 9-4 Market = Replacement Cost Lower of Cost or Replacement Cost Loss should be recorded when loss occurs, not in the period of sale. A company abandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost. Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
  • Slide 5
  • 9-5 Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Illustration 9-1
  • Slide 6
  • 9-6 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? Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Ceiling and Floor
  • Slide 7
  • 9-7 Net realizable value (NRV) is the is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal (often referred to as net selling price). Illustration 9-2 Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
  • Slide 8
  • 9-8 Not< Cost Market Ceiling = NRV Replacement Cost Replacement Cost Floor = NRV less Normal Profit Margin Floor = NRV less Normal Profit Margin GAAP LCM GAAP LCM What is the rationale for the Ceiling and Floor limitations? Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Not> Illustration 9-3
  • Slide 9
  • 9-9 Ceiling prevents overstatement of the value of obsolete, damaged, or shopworn inventories. Floor deters understatement of inventory and overstatement of the loss in the current period. Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Limitations
  • Slide 10
  • 9-10 Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. How LCM Works (Individual Items) Illustration 9-5
  • Slide 11
  • 9-11 Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Methods of Applying LCM Illustration 9-6
  • Slide 12
  • 9-12 LO 1 Describe and apply the lower-of-cost-or-market rule. Lower-of-Cost-or-MarketLower-of-Cost-or-Market Ending inventory (cost) $ 82,000 Ending inventory (market)70,000 Adjustment to LCM $ 12,000 Loss Method COGS Method COGS Method Recording Market Instead of Cost
  • Slide 13
  • 9-13 LO 1 Describe and apply the lower-of-cost-or-market rule. Lower-of-Cost-or-MarketLower-of-Cost-or-Market Balance Sheet Presentation
  • Slide 14
  • 9-14 LO 1 Lower-of-Cost-or-MarketLower-of-Cost-or-Market Income Statement Presentation
  • Slide 15
  • 9-15 P9-1: Remmers Company manufactures desks. The company attempts to obtain a 20% gross margin on selling price. At December 31, 2012, the following finished desks appear in the companys inventory. The 2012 catalog was in effect through November 2012, and the 2013 catalog is effective as of December 1, 2012. Instructions: At what amount should each of the four desks appear in the companys December 31, 2012, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-market approach for valuation of inventories on an individual-item basis? Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
  • Slide 16
  • 9-16 Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
  • Slide 17
  • 9-17 Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
  • Slide 18
  • 9-18 Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
  • Slide 19
  • 9-19 Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule.
  • Slide 20
  • 9-20 LO 1 Describe and apply the lower-of-cost-or-market rule. Use of an AllowanceMultiple Periods Lower-of-Cost-or-MarketLower-of-Cost-or-Market In general, accountants leave the allowance account on the books. They merely adjust the balance at the next year-end to agree with the discrepancy between cost and the lower-of- cost-or-market at that balance sheet date. Illustration 9-10
  • Slide 21
  • 9-21 Expense recorded when loss in utility occurs. Profit on sale recognized at the point of sale. Inventory valued at cost in one year and at market in the next year. Net income in year of loss is lower. Net income in subsequent period may be higher than normal if expected reductions in sales price do not materialize. LCM uses a normal profit in determining inventory values, which is a subjective measure. Some Deficiencies: Lower-of-Cost-or-MarketLower-of-Cost-or-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Evaluation of LCM Rule
  • Slide 22
  • 9-22 (1) (1)a controlled market with a quoted price applicable to all quantities, and (2) (2)no significant costs of disposal (rare metals and agricultural products) or (3) (3)too difficult to obtain cost figures (meatpacking). Permitted by GAAP under the following conditions: Valuation Bases Valuation at Net Realizable Value LO 2 Explain when companies value inventories at net realizable value.
  • Slide 23
  • 9-23 Used when buying varying units in a single lump-sum purchase. Valuation Bases Valuation Using Relative Sales Value E9-7: Larsen Realty Corporation purchased a tract of unimproved land for $55,000. This land was improved and subdivided into building lots at an additional cost of $30,000. These building lots were all of the same size but owing to differences in location were offered for sale at different prices as follows. Operating expenses allocated to this project total $18,200. Instructions: Calculate the net income realized on this operation to date. LO 3 Explain when companies use the relative sales value method to value inventories.
  • Slide 24
  • 9-24 Valuation Bases E9-7 (Relative Sales Value Method): x=x = = x LO 3 Explain when companies use the relative sales value method to value inventories.
  • Slide 25
  • 9-25 Generally seller retains title to the merchandise. Buyer recognizes no asset or liability. If material, the buyer should disclose contract details in footnote. If the contract price is greater than the market price, and the buyer expects that losses will occur when the purchase is effected, the buyer should recognize a liability and a corresponding loss in the period during which such declines in market prices take place. Valuation Bases LO 4 Discuss accounting issues related to purchase commitments. Purchase CommitmentsA Special Problem
  • Slide 26
  • 9-26 Valuation Bases LO 4 Discuss accounting issues related to purchase commitments. Illustration: St. Regis Paper Co. signed timber-cutting contracts to be executed in 2013 at a price of $10,000,000. Assume further that the market price of the timber cutting rights on December 31, 2012, dropped to $7,000,000. St. Regis would make the following entry on December 31, 2012. Other income and expense in the Income statement. Current liabilities on the statement of financial position.
  • Slide 27
  • 9-27 Valuation Bases LO 4 Discuss accounting issues related to purchase commitments. Purchases (Inventory) 7,000,000 Purchase Commitment Liability 3,000,000 Cash 10,000,000 Assume the government permitted St. Regis to reduce its contract price and therefore its commitment by $1,000,000. Purchase Commitment Liability 1,000,000 Unrealized Holding Gain or LossIncome1,000,000 Illustration: When St. Regis cuts the timber at a cost of $10 million, it would make the following entry.
  • Slide 28
  • 9-28 Relies on Three Assumptions: Gross Profit Method of Estimating Inventory LO 5 Determine ending inventory by applying the gross profit method. Substitute Measure to Approximate Inventory (1) (1)Beginning inventory plus purchases equal total goods to be accounted for. (2) (2)Goods not sold must be on hand. (3) (3)The sales, reduced to cost, deducted from the sum of the opening inventory plus purchases, equal ending inventory.
  • Slide 29
  • 9-29 Gross Profit Method LO 5 Determine ending inventory by applying the gross profit method. Illustration

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