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Transcript of 9-1 Prepared by Coby Harmon University of California, Santa Barbara Intermediate Accounting.
9-1
Prepared by Coby Harmon
University of California, Santa Barbara
Intermediate Accounting
9-2
Intermediate Accounting
14th Edition
9Inventories: Additional Valuation Issues
Kieso, Weygandt, and Warfield
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 IssuesInventories: Additional Valuation IssuesInventories: Additional Valuation IssuesInventories: Additional Valuation Issues
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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
9-5
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1
Illustration 9-1
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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Ceiling and Floor
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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
9-8
NotNot<<
CostCost MarketMarket
Ceiling = NRVCeiling = NRV
ReplacementCost
ReplacementCost
Floor =NRV less Normal
Profit Margin
Floor =NRV less Normal
Profit MarginGAAPLCM
GAAPLCM
What is the rationale for the
Ceiling and Floor limitations?
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
NotNot>>
Illustration 9-3
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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Limitations
9-10
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-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
9-11
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Methods of Applying LCMIllustration 9-6
9-12 LO 1 Describe and apply the lower-of-cost-or-market rule.
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
Ending inventory (cost) $ 82,000
Ending inventory (market) 70,000
Adjustment to LCM $ 12,000
Loss MethodLoss
Method
COGSMethodCOGSMethod
Recording “Market” Instead of Cost
9-13
Loss COGS
Method Method
Current assets:
Cash 100,000$ 100,000$
Accounts receivable 350,000 350,000
Inventory 770,000 (758,000)
Less: inventory allowance (12,000)
Prepaids 20,000 20,000
Total current assets 1,175,000 1,175,000
LO 1 Describe and apply the lower-of-cost-or-market rule.
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
Balance Sheet Presentation
9-14
Loss COGS
Method Method
Sales 300,000$ 300,000$
Cost of goods sold 120,000 132,000
Gross profit 180,000 168,000
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 (12,000) -
Interest income 5,000 5,000
Total other (7,000) 5,000
Income from operations 108,000 108,000
Income tax expense 32,400 32,400
Net income 75,600$ 75,600$
LO 1
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
Income Statement Presentation
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 company’s 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 company’s 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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
9-16
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Finished Desks A
Inventory cost 470$
Est. cost to manufacture 460
Commissions and disposal costs 50
Catalog selling price 500
9-17
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Finished Desks B
Inventory cost 450$
Est. cost to manufacture 430
Commissions and disposal costs 60
Catalog selling price 540
9-18
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Finished Desks C
Inventory cost 830$
Est. cost to manufacture 610
Commissions and disposal costs 80
Catalog selling price 900
9-19
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Finished Desks D
Inventory cost 960$
Est. cost to manufacture 1,000
Commissions and disposal costs 130
Catalog selling price 1,200
9-20 LO 1 Describe and apply the lower-of-cost-or-market rule.
Use of an Allowance—Multiple Periods
Lower-of-Cost-or-MarketLower-of-Cost-or-MarketLower-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
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-MarketLower-of-Cost-or-MarketLower-of-Cost-or-Market
LO 1 Describe and apply the lower-of-cost-or-market rule.
Evaluation of LCM Rule
9-22
(1) a controlled market with a quoted price applicable to all quantities, and
(2) no significant costs of disposal (rare metals and agricultural products)
or
(3) too difficult to obtain cost figures (meatpacking).
Permitted by GAAP under the following conditions:
Valuation BasesValuation BasesValuation BasesValuation Bases
Valuation at Net Realizable Value
LO 2 Explain when companies value inventories at net realizable value.
9-23
Used when buying varying units in a single lump-sum purchase.
Valuation BasesValuation BasesValuation BasesValuation 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 $18,200.
Instructions: Calculate the net income realized on this operation to date.
No. of Price Lots Unsold
Group Lots per Lot at Year-End
1 9 3,000$ 5
2 15 4,000 7
3 19 2,000 2
LO 3 Explain when companies use the relative sales value method to value inventories.
9-24
Valuation BasesValuation BasesValuation BasesValuation Bases
E9-7 (Relative Sales Value Method):
No. of Price Selling Relative Total Cost Cost
Group Lots per Lot Price Sales Price Cost Allocated Per Lot
1 9 3,000$ 27,000$ $27,000/125,000 85,000$ 18,360$ 2,040$
2 15 4,000 60,000 60,000/125,000 85,000 40,800 2,720
3 19 2,000 38,000 38,000/125,000 85,000 25,840 1,360
125,000$ 85,000$
Lots Price Total Cost Total Cost Calculation of Net IncomeGroup Sold per Lot Sales Per Lot of Goods Sales 78,000$
1 4 3,000$ 12,000$ 2,040$ 8,160$ Cost of good sold 53,040
2 8 4,000 32,000 2,720 21,760 Gross profit 24,960
3 17 2,000 34,000 1,360 23,120 Expenses 18,200
78,000$ 53,040$ Net income 6,760$
xx == xx ==
==xx
LO 3 Explain when companies use the relative sales value method to value inventories.
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 BasesValuation BasesValuation BasesValuation Bases
LO 4 Discuss accounting issues related to purchase commitments.
Purchase Commitments—A Special Problem
9-26
Valuation BasesValuation BasesValuation BasesValuation 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.
9-27
Valuation BasesValuation BasesValuation BasesValuation 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 Loss—Income 1,000,000
Illustration: When St. Regis cuts the timber at a cost of $10
million, it would make the following entry.
9-28
Relies on Three Assumptions:
Gross Profit Method of Estimating InventoryGross Profit Method of Estimating InventoryGross Profit Method of Estimating InventoryGross Profit Method of Estimating Inventory
LO 5 Determine ending inventory by applying the gross profit method.
Substitute Measure to Approximate Inventory
(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.
9-29
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
LO 5 Determine ending inventory by applying the gross profit method.
Illustration: Cetus Corp. has a beginning inventory of $60,000
and purchases of $200,000, both at cost. Sales at selling price
amount to $280,000. The gross profit on selling price is 30
percent. Cetus applies the gross margin method as follows.
Illustration 9-14
9-30
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
LO 5 Determine ending inventory by applying the gross profit method.
Computation of Gross Profit PercentageIllustration 9-17
9-31
E9-12: Astaire Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May.
Instructions:
(a) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of sales.
(b) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of cost.
Inventory, May 1 160,000$ Purchases (gross) 640,000 Freight-in 30,000 Sales 1,000,000 Sales returns 70,000 Purchase discounts 12,000
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
LO 5
9-32
E9-12 (Solution):
Inventory, May 1 (at cost) $ 160,000
Purchases (gross) (at cost) 640,000
Purchase discounts (12,000)
Freight-in 30,000
Goods available (at cost) 818,000
Sales (at selling price) $ 1,000,000
Sales returns (at selling price) (70,000)
Net sales (at selling price) 930,000
Less gross profit (25% of $930,000) 232,500
Sales (at cost) 697,500
Approximate inventory, May 31 (at cost) $ 120,500
(a) Compute the estimated inventory assuming gross profit is 25% of sales.
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
LO 5 Determine ending inventory by applying the gross profit method.
9-33
(b) Compute the estimated inventory assuming gross profit is 25% of cost.
E9-12 (Solution):
Inventory, May 1 (at cost) $ 160,000
Purchases (gross) (at cost) 640,000
Purchase discounts (12,000)
Freight-in 30,000
Goods available (at cost) 818,000
Sales (at selling price) $ 1,000,000
Sales returns (at selling price) (70,000)
Net sales (at selling price) 930,000
Less gross profit (20% of $930,000) 186,000
Sales (at cost) 744,000
Approximate inventory, May 31 (at cost) $ 74,000
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
LO 5 Determine ending inventory by applying the gross profit method.
25%
100% + 25%= 20% of sales
9-34
Disadvantages:
Gross Profit MethodGross Profit MethodGross Profit MethodGross Profit Method
LO 5 Determine ending inventory by applying the gross profit method.
(1) Provides an estimate of ending inventory.
(2) Uses past percentages in calculation.
(3) A blanket gross profit rate may not be representative.
(4) Normally unacceptable for financial reporting purposes.
GAAP requires a physical inventory as additional
verification.
Evaluation of Gross Profit Method
9-35
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
LO 6 Determine ending inventory by applying the retail inventory method.
A method used by retailers, to value inventory without a
physical count, by converting retail prices to cost.
(1) Total cost and retail value of goods purchased.
(2) Total cost and retail value of the goods available for
sale.
(3) Sales for the period.
Requires retailers to keep:
Methods Conventional Method Cost Method LIFO Dollar-value LIFO
9-36
P9-8: Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2013.
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
COST RETAILBeg. inventory, Oct. 1 52,000$ 78,000$ Purchases 272,000 423,000 Freight in 16,600 Purchase returns 5,600 8,000 Additional markups 9,000 Markup cancellations 2,000 Markdowns (net) 3,600 Normal spoilage 10,000 Sales 390,000
Instructions:
Prepare a schedule computing estimate retail inventory using the following methods:
(1) Conventional
(2) Cost
LO 6 Determine ending inventory by applying the retail inventory method.
9-37
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
LO 6 Determine ending inventory by applying the retail inventory method.
P9-8 Solution - CONVENTIONAL Method:Cost to
COST RETAIL Retail %Beg. inventory 52,000$ 78,000$ Purchases 272,000 423,000 Freight in 16,600 Purchase returns (5,600) (8,000) Markups, net 7,000
Current year additions 283,000 422,000 Goods available for sale 335,000 500,000 67.00% Markdowns, net (3,600)
Normal spoilage (10,000) Sales (390,000) Ending inventory at retail 96,400$
Ending inventory at Cost:96,400$ x 67.00% = 64,588$
==//
9-38
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
LO 6 Determine ending inventory by applying the retail inventory method.
P9-8 Solution - COST Method:Cost to
COST RETAIL Retail %Beg. inventory 52,000$ 78,000$ Purchases 272,000 423,000 Freight in 16,600 Purchase returns (5,600) (8,000) Markdowns, net (3,600) Markups, net 7,000
Current year additions 283,000 418,400 Goods available for sale 335,000 496,400 67.49%
Normal spoilage (10,000) Sales (390,000) Ending inventory at retail 96,400$
Ending inventory at Cost:96,400$ x 67.49% = 65,056$
==//
9-39
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
LO 6 Determine ending inventory by applying the retail inventory method.
Freight costs
Purchase returns
Purchase discounts and allowances
Transfers-in
Normal spoilage
Abnormal shortages
Employee discounts
Special Items Relating to Retail Method
9-40
Special Items
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
LO 6
Illustration 9-23
9-41
Widely used for the following reasons:
(1) To permit the computation of net income without a physical count of inventory.
(2) Control measure in determining inventory shortages.
(3) Regulating quantities of merchandise on hand.
(4) Insurance information.
Retail Inventory MethodRetail Inventory MethodRetail Inventory MethodRetail Inventory Method
LO 6 Determine ending inventory by applying the retail inventory method.
Some companies refine the retail method by computing inventory separately by departments or class of merchandise with similar gross profits.
Evaluation of Retail Inventory Method
9-42
Accounting standards require disclosure of:
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
LO 7 Explain how to report and analyze inventory.
Presentation of Inventories
(1) Composition of the inventory, inventory financing arrangements, and the inventory costing methods employed.
(2) Consistent application of costing methods from one period to another.
(3) Manufacturers should report the inventory composition either in the balance sheet or in a separate schedule in the notes.
9-43
Accounting standards require disclosure of:
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
LO 7 Explain how to report and analyze inventory.
Presentation of Inventories
(4) Significant or unusual financing arrangements relating to inventories.
(5) Companies should present inventories pledged as collateral for a loan in the current assets section rather than as an offset to the liability.
(6) Basis on which it states inventory amounts (lower of-cost-or-market) and the method used in determining cost (LIFO, FIFO, average cost, etc.).
9-44
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
LO 7 Explain how to report and analyze inventory.
Presentation of Inventories
Illustration 9-24Disclosure of InventoryMethods
9-45
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
LO 7
Illustration 9-25Disclosure of Trade Practice in Valuing Inventories
Presentation of Inventories
9-46
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
LO 7 Explain how to report and analyze inventory.
Common ratios used in the management and evaluation of
inventory levels are inventory turnover and average days
to sell the inventory.
Analysis of Inventories
9-47
Measures the number of times on average a company
sells the inventory during the period.
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
LO 7 Explain how to report and analyze inventory.
Inventory Turnover Ratio
Illustration 9-26
Illustration: In its 2009 annual report Kellogg Company reported
a beginning inventory of $897 million, an ending inventory of $910
million, and cost of goods sold of $7,184 million for the year.
9-48
Measure represents the average number of days’ sales
for which a company has inventory on hand.
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
LO 7 Explain how to report and analyze inventory.
Average Days to Sell Inventory
365 days / 7.95 times = every 45.9 days
Average Days to Sell
Illustration 9-26
9-49 LO 8 Determine ending inventory by applying the LIFO retail methods.
Primary reason to use LIFO
Tax advantages.
Results in a better matching of costs and revenues.
The use of LIFO retail is made under two assumptions:
1. stable prices and
2. fluctuating prices.
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-50 LO 8 Determine ending inventory by applying the LIFO retail methods.
Stable Prices—LIFO Retail Method
A major assumption of the LIFO retail method is that the
markups and markdowns apply only to the goods purchased
during the current period and not to the beginning inventory.
Beginning inventory is excluded from the cost-to-retail
percentage.
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-51 LO 8 Determine ending inventory by applying the LIFO retail methods.
Illustration 9A-1LIFO Retail Method—Stable Prices
APPENDIX 9A LIFO RETAIL METHODS
9-52 LO 8 Determine ending inventory by applying the LIFO retail methods.
Illustration 9A-2Ending Inventory at LIFO Cost, 2012—Stable Prices
Inventory is composed of two layers.
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-53 LO 8 Determine ending inventory by applying the LIFO retail methods.
Illustration 9A-3Ending Inventory at LIFO Cost, 2013—Stable Prices
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
Assume that the ending inventory for 2013 at retail is $50,000. Notice that the 2012 layer is reduced from $11,000 to $5,000.
9-54 LO 8 Determine ending inventory by applying the LIFO retail methods.
Fluctuating Prices—Dollar-Value LIFO Retail
If the price level does change, the company must eliminate
the price change so as to measure the real increase in
inventory, not the dollar increase.
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-55 LO 8 Determine ending inventory by applying the LIFO retail methods.
Illustration: Assume that the beginning inventory had a retail market
value of $10,000 and the ending inventory had a retail market value of
$15,000. Assume further that the price level has risen from 100 to 125.
It is inappropriate to suggest that a real increase in inventory of
$5,000 has occurred. Instead, the company must deflate the ending
inventory at retail.Illustration 9A-4
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-56
Illustration: Assume that the current 2010 price index is 112
(prior year 100) and that the inventory ($56,000) has remained
unchanged.Illustration 9A-5
Dollar-Value LIFO Retail Method—
FluctuatingPrices
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
LO 8
9-57 LO 8 Determine ending inventory by applying the LIFO retail methods.
Illustration: From this information, we compute the inventory amount at cost:
Illustration 9A-6
Hernandez must restate layers of a particular year to the prices in effect in the year when the layer was added.
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-58 LO 8 Determine ending inventory by applying the LIFO retail methods.
Illustration 9A-7
Comparison of Effect of Price Assumptions
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-59 LO 8
Illustration: Using the data from the previous example, assume that
the retail value of the 2013 ending inventory at current prices is
$64,800, the 2013 price index is 120 percent of base-year, and the
cost-to-retail percentage is 75 percent. Compute the ending inventory
at LIFO cost.Illustration 9A-8
Subsequent Adjustments under Dollar-Value LIFO Retail
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-60
Illustration: Conversely assume that in 2011 the ending inventory in
base-year prices is $48,000. Compute the ending inventory at LIFO
cost.Illustration 9A-9
Subsequent Adjustments under Dollar-Value LIFO Retail
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
LO 8 Determine ending inventory by applying the LIFO retail methods.
9-61 LO 8 Determine ending inventory by applying the LIFO retail methods.
Changing from Conventional Retail to LIFO
Illustration: Hackman Clothing Store employs the conventional
retail method but wishes to change to the LIFO retail method
beginning in 2013. The amounts shown by the firm’s books are as
follows.
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-62
Conventional Retail Inventory Method Illustration 9A-10
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
LO 8
9-63
Illustration 9A-11
Hakeman Clothing can then quickly approximate the ending inventory for 2012 under the LIFO retail method.
The difference of $500 ($11,250 - $10,750) between the LIFO retail method and the conventional retail method is the amount by which the company must adjust beginning inventory for 2013.
LO 8 Determine ending inventory by applying the LIFO retail methods.
APPENDIXAPPENDIX 9A LIFO RETAIL METHODS
9-64
RELEVANT FACTS
Goods in transit, consigned goods, special sales agreements—as well as the costs to include in inventory are essentially accounted for the same under IFRS and GAAP.
GAAP permits the use of LIFO for inventory valuation. IFRS prohibits its use. FIFO and average cost are the only two acceptable cost flow assumptions permitted under IFRS. Both sets of standards permit specific identification where appropriate.
In the lower-of-cost-or-market test for inventory valuation, IFRS defines market as net realizable value. GAAP defines market as replacement cost subject to the constraints of net realizable value (the ceiling) and net realizable value less a normal markup (the floor). IFRS does not use a ceiling or a floor to determine market.
9-65
RELEVANT FACTS
Under GAAP, if inventory is written down under the lower-of-cost-or-market valuation, the new basis is now considered its cost. As a result, the inventory may not be written back up to its original cost in a subsequent period. Under IFRS, the write-down may be reversed in a subsequent period up to the amount of the previous write-down. Both the write-down and any subsequent reversal should be reported on the income statement.
IFRS requires both biological assets and agricultural produce at the point of harvest to be reported to net realizable value. GAAP does not require companies to account for all biological assets in the same way. Furthermore, these assets generally are not reported at net realizable value. Disclosure requirements also differ between the two sets of standards.
9-66
All of the following are key similarities between GAAP and IFRS with
respect to accounting for inventories except:
a. costs to include in inventories are similar.
b. LIFO cost flow assumption where appropriate is used by both
sets of standards.
c. fair value valuation of inventories is prohibited by both sets of
standards.
d. guidelines on ownership of goods are similar.
IFRS SELF-TEST QUESTION
9-67
All of the following are key differences between GAAP and IFRS with
respect to accounting for inventories except the:
a. definition of the lower-of-cost-or-market test for inventory
valuation differs between GAAP and IFRS.
b. average cost method is prohibited under IFRS.
c. inventory basis determination for write-downs differs between
GAAP and IFRS.
d. guidelines are more principles based under IFRS than they are
under GAAP.
IFRS SELF-TEST QUESTION
9-68
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