wiley - chapter 9: inventories: additional valuation issues
DESCRIPTION
Intermediate Accounting, 13th Edition,Donald E. Kieso, Jerry J. Weygandt, Terry D. WarfieldTRANSCRIPT
Chapter 9-1
Inventories: Additional Inventories: Additional Valuation IssuesValuation Issues
Inventories: Additional Inventories: Additional Valuation IssuesValuation Issues
ChapteChapter r
99
Chapter 9-2
Lower of Cost or Market value determined
Market = Replacement Cost if reasonable or other calculated amounts if not reasonable
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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LCM
Chapter 9-3
Why FASB start with Replacement Cost (RC) for Market?
RC allows a consistent rate of gross profit.
Decline in the RC usually = decline in selling price.
If reduction in RC fails to indicate reduction in utility, then two additional valuation limitations are used:
Ceiling - net realizable value (selling price minus selling/disposal costs)
Floor - net realizable value less a normal profit margin.
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
Ceiling and Floor
Chapter 9-4
E9-2
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
Chapter 9-5
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
Recording LCM
Ending inventory (cost) $ 415,000 Ending inventory (LCM) 350,000Adjustment to LCM $ 65,000
Allowance on inventory
65,000
Loss on inventory 65,000
Inventory
65,000
Cost of goods sold 65,000
AllowanceMethod
AllowanceMethod
DirectMethodDirect
Method
Chapter 9-6
Allowance Direct
Current assets:
Cash 100,000$ 100,000$
Accounts receivable 350,000 350,000
Inventory 770,000 705,000
Less: inventory allowance (65,000)
Prepaids 20,000 20,000
Total current assets 1,175,000 1,175,000
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
Balance Sheet Presentation
Chapter 9-7
Allowance Direct
Sales 300,000$ 300,000$
Cost of goods sold 120,000 185,000
Gross profit 180,000 115,000
Operating expenses:
Selling 45,000 45,000
General and administrative 20,000 20,000
Total operating expenses 65,000 65,000
Other revenue and expense:
Loss on inventory 65,000 -
I nterest income 5,000 5,000
Total other (60,000) 5,000
I ncome from operations 55,000 55,000
I ncome tax expense 16,500 16,500
Net income 38,500$ 38,500$
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
Income Statement Presentation
Chapter 9-8
E9-4, P9-3
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
Chapter 9-9
Inventory Estimation TechniquesInventory Estimation TechniquesInventory Estimation TechniquesInventory Estimation Techniques
Why do we estimate?
Data lost to unforeseen circumstances – fire, insurance
F/S needed during the year and physical inventory not available
Auditor testing for reasonableness
Forecasting and budgeting
Chapter 9-10
Inventory Estimation Techniques - Inventory Estimation Techniques - Retail Inventory MethodRetail Inventory Method
Inventory Estimation Techniques - Inventory Estimation Techniques - Retail Inventory MethodRetail Inventory Method
A method used primarily by retailers
Accepted by IRS and FASB for reporting inventory
Requires retailers to keep:
(1) the total cost and retail value of goods purchased,
(2) the total cost and retail value of the goods available for sale, and
(3) the sales for the period.
Chapter 9-11
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
Step 1: Calculate Ending inventory info at retail:
BI® + Purch® – Sales = EI® Note: CGAS® = BI® + Purch®
Step 2: Calculate a Cost to retail %: CGAS © / CGAS ®
Step 3: Estimate EI ©:
EI © = EI ® * CGAS © / CGAS ®
Chapter 9-12
Main differences in 3 Retail Inventory Methods:
1) Average Cost
Retail cost includes markups, markdowns to determine Cost-to-Retail%
2) LCM ( conventional retail)
Exclude markdowns in determining Cost-to-Retail%
3) LIFO
Determine Cost-to-Retail% for beginning and current period inventory layers (based on Avg. cost method)
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
Chapter 9-13
Include Additional items that affect CostRetail% and EI at retail prices (discussed in handout).
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
Chapter 9-14
E 9-19 (adapted)
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
Chapter 9-15
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 holding losses in the period during which such declines in market prices take place.
No holding gains are recognized.
Purchase CommitmentsPurchase CommitmentsPurchase CommitmentsPurchase Commitments
Chapter 9-16
See BE 9-5 & 6
Purchase CommitmentsPurchase CommitmentsPurchase CommitmentsPurchase Commitments
Chapter 9-17
Inventory Estimation Techniques - Inventory Estimation Techniques - Gross Profit MethodGross Profit Method
Inventory Estimation Techniques - Inventory Estimation Techniques - Gross Profit MethodGross Profit Method
Provides an estimate of ending inventory.
Only acceptable for interim (generally quarterly) reporting purposes.
Relies on Three Assumptions:
(1) Beginning inventory plus purchases equal total goods to be accounted for.
(2) Goods not sold must be on hand.
(3) The sales, reduced to cost, deducted from the sum of the opening inventory plus purchases, equal ending inventory.
Chapter 9-18
GrossGross ProfitProfit MethodMethodGrossGross ProfitProfit MethodMethod
Computation of Gross Profit PercentageIllustration 9-17
Chapter 9-19
BE 9-7, E9-12
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
Chapter 9-20
U.S. GAAP permits the use of LIFO for inventory valuation. iGAAP prohibits its use.
In the lower-of-cost-or-market test for inventory valuation, iGAAP defines market as net realizable value. U.S. GAAP defines market as replacement cost subject to the constraints.
In U.S. GAAP, inventory written down under the lower-of-cost-or-market valuation may not be written back up to its original cost in a subsequent period. Under iGAAP, the write-down may be reversed in a subsequent period.