Kế toán, kiểm toán - Chapter 09: Inventories: additional issues

Inventories:Additional Issues Chapter 9Reporting —Lower of Cost or MarketInventories are valued at the lower of cost or market (LCM).LCM is a departure from historical cost. The method causes losses to be recognized in the period the value of inventory declines below its cost rather than in the period that the goods ultimately are sold.Determining Market ValueMarket Should Not Exceed Net RealizableValue (Ceiling)Market Should Not Be Less Than Net Realizable Value less Normal Profit (Floor)GAAP defines “market value” in terms of current replacement cost.Market should not be greater than the “ceiling” or less than the “floor.”Determining Market ValueCeilingNRVReplacementCostNRV – NPFloorDesignatedMarketCostNot More ThanNot Less ThanOrStep 1Determine Designated MarketStep 2Compare Designated Market with CostLower of Costor Market1. Apply LCM to each individual item in inventory such as printers. Applying Lower of Cost or MarketLower of cost or market can be applied 3 different ways. 1. Apply LCM to each individual item in inventory. 2. Apply LCM to logical inventorycategories, such as desktop and laptop computers. Applying Lower of Cost or MarketLower of cost or market can be applied 3 different ways. 1. Apply LCM to each individual item in inventory. 2. Apply LCM to logical inventorycategories. 3. Apply LCM to the entire inventory as a group. Applying Lower of Cost or MarketLower of cost or market can be applied 3 different ways. U. S. GAAP vs. IFRSInventory is valued at the lower of cost or market with market selected from replacement cost, net realizable value or NRV reduced by the normal profit margin. Designated market is compared to historical cost to determine LCM.The LCM rule can be applied to individual items, logical inventory categories, or the entire inventory.Reversals are not permitted.Inventory is valued at the lower or cost of market and net realizable value.The assessment usually is applied to individual items, although using logical inventory categories is allowed under certain circumstances.If an inventory write-down is no longer appropriate, it must be reversed.International and U.S. standards for valuing inventory at the lower of cost or market are slightly different.Inventory Estimation TechniquesEstimate instead of taking physical inventory Less costly Less time-consumingTwo popular methods of estimating ending inventory are the . . .Gross profit methodRetail inventory methodGross Profit MethodUseful when . . .Estimating inventory and COGS for interim reports.Determining the cost of inventory lost, destroyed, or stolen.Auditors in testing the overall reasonableness of client inventories.Preparing budgets and forecasts.NOTE: The gross profit method is not acceptable for use in annual financial statements.Gross Profit MethodThis method assumes that the historical gross margin ratio is reasonably constant in the short-run.Beginning Inventory (from accounting records)Plus: Net purchases (from accounting records)Goods available for sale (calculated)Less: Cost of goods sold (estimated)Ending inventory (estimated)   Estimate the Gross Profit RatioThe Retail Inventory MethodThis 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 percentage.Objective: Convert ending inventory at retail to ending inventory at cost.The Retail Inventory MethodTerm Meaning Initial markup Original amount of markup from cost to selling price. Additional markup Increase in selling price subsequent to initial markup. Markup cancellation Elimination of an additional markup. Markdown Reduction in selling price below the original selling price. Markdown cancellation Elimination of a markdown.Retail TerminologyRetail TerminologyAn Example of the TerminologyThe Retail Inventory MethodWe need to know . . .Sales for the period.Beginning inventory at retail and cost.Adjustments to the original retail price.Net purchases at retail and cost.The LIFO Retail MethodAssume 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. The LIFO Retail MethodBeginning inventory has its owncost-to-retail percentage.   LIFO cost-=Net purchasesto-retail %Retail value (Net purchases  + Net markups - Net markdowns)   Other Issues of Retail MethodElement TreatmentBefore calculating the cost-to-retail percentage   Freight-in Added to the cost column Purchase returns Deducted in both the cost and retail columns Purchase discounts taken Deducted in the cost column Abnormal shortage, spoilage, or theft Deducted in both the cost and retail columnsAfter calculating the cost-to-retain percentage   Normal shortage, spoilage, or theft Deducted in the retail column Employee discounts Added to net salesDollar-Value LIFO RetailWe need to eliminate the effect of any price changes before we compare the ending inventory with the beginning inventory.Changes in Inventory MethodRecall that most voluntary changes in accounting principles are reported retrospectively. This means reporting all previous periods’ financial statements as though the new method had been used in all prior periods.Changes in inventory methods, other than a change to LIFO, are treated retrospectively.Change to the LIFO MethodWhen a company elects to change to LIFO, it is usually impossible to calculate the income effect on prior years. As a result, the company does not report the change retrospectively. Instead, the LIFO method is used from the point of adoption forward.A disclosure note is needed to explain (a) thenature of the change, (b) the effect of thechange on current year’s income andearnings per share, and (c) why retrospective application was impracticable.Inventory ErrorsWhen analyzing inventory errors, it’s helpful to visualize the way cost of goods sold, net income, and retained earnings are determined.Inventory Errors Overstatement of ending inventoryUnderstates cost of goods sold andOverstates pretax income. Understatement of ending inventoryOverstates cost of goods sold andUnderstates pretax income.Inventory ErrorsOverstatement of beginning inventoryOverstates cost of goods sold andUnderstates pretax income.Understatement of beginning inventoryUnderstates cost of goods sold andOverstates pretax income.Inventory ErrorsWhen the Inventory Error is Discovered the Following YearIf an error was made in 2013, but not discovered until 2014, the 2013 financial statements were incorrect as a result of the error. The error should be retrospectively restated to reflect the correct inventory amount, cost of goods sold, net income, and retained earnings when the comparative 2014 and 2013 financial statements are issued for 2014.When the Inventory Error is Discovered Subsequentto the Following YearIf an error was made in 2013, but not discovered until 2015, all previous years’ financial statements that were incorrect as a result of the error also are retrospectively restated to reflect the correct inventory, cost of goods sold, retained earnings, and net income even though no correcting entry is needed in 2015. The error has self-corrected and no prior period adjustment is needed.End of Chapter 9