Lecture 11 - Inventories: Additional Issues. In this chapter, the following content will be discussed: Describe the steps in determining inventory quantities, explain the accounting for inventories and apply the inventory cost flow methods, explain the financial effects of the inventory cost flow assumptions. | Inventories : Additional Issues PART II: Corporate Accounting Concepts and Issues Lecture 11 Describe and apply the lower-of-cost-or-net realizable value rule. Explain when companies value inventories at net realizable value. Explain when companies use the relative sales value method to value inventories. Discuss accounting issues related to purchase commitments. Determine ending inventory by applying the gross profit method. Determine ending inventory by applying the retail inventory method. Explain how to report and analyze inventory. Learning Objectives 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: . | Inventories : Additional Issues PART II: Corporate Accounting Concepts and Issues Lecture 11 Describe and apply the lower-of-cost-or-net realizable value rule. Explain when companies value inventories at net realizable value. Explain when companies use the relative sales value method to value inventories. Discuss accounting issues related to purchase commitments. Determine ending inventory by applying the gross profit method. Determine ending inventory by applying the retail inventory method. Explain how to report and analyze inventory. Learning Objectives 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 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-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Lower-of-Cost-or-Market LO 1 Illustration 9-1 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-Market LO 1 Describe and apply the lower-of-cost-or-market rule. Ceiling and Floor Net realizable value (NRV) is the is the estimated selling price in the ordinary course of business, less reasonably predictable
