Kế toán, kiểm toán - Chương 09: Inventories: Additional valuation issues

C H A P T E R 9INVENTORIES: ADDITIONAL VALUATION ISSUESIntermediate Accounting13th EditionKieso, Weygandt, and Warfield Describe and apply the lower-of-cost-or-market 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 ObjectivesNet realizable valueRelative sales valuePurchase commitmentsLower-of-Cost-or-MarketValuation BasesGross Profit MethodRetail Inventory MethodPresentation and AnalysisCeiling and floorHow LCM worksApplication of LCM “Market”Evaluation of ruleGross profit percentageEvaluation of methodConceptsConventional methodSpecial itemsEvaluation of methodPresentationAnalysisInventories: Additional Valuation IssuesMarket = Replacement CostLower of Cost or Replacement CostLoss 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-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.LCMDecline 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 andFloor - net realizable value less a normal profit margin.Why use Replacement Cost (RC) for Market?Lower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.Ceiling and FloorNotIllustration 9-3Ceiling – 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-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.Rationale for LimitationsLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.How LCM Works (Individual Items)Illustration 9-5Solution on notes pageLower-of-Cost-or-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.Methods of Applying LCMIllustration 9-6Solution on notes pageLO 1 Describe and apply the lower-of-cost-or-market rule.Lower-of-Cost-or-MarketRecording LCM (data from Illus. 9-5 and 9-6)Ending inventory (cost) $ 415,000 Ending inventory (LCM) 350,000Adjustment to LCM $ 65,000Allowance on inventory 65,000Loss on inventory 65,000Inventory 65,000Cost of goods sold 65,000AllowanceMethodDirectMethodLO 1 Describe and apply the lower-of-cost-or-market rule.Lower-of-Cost-or-MarketBalance Sheet PresentationLO 1 Describe and apply the lower-of-cost-or-market rule.Lower-of-Cost-or-MarketIncome Statement PresentationP9-1: KC Company manufactures desks. The company attempts to obtain a 20% gross margin on selling price. At December 31, 2010, the following finished desks appear in the company’s inventory.Instructions: At what amount should the desks appear in the company’s December 31, 2010, 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-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.NotNotNotNotExpense 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-MarketLO 1 Describe and apply the lower-of-cost-or-market rule.Evaluation of LCM Rulea controlled market with a quoted price applicable to all quantities, and 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 BasesLO 2 Explain when companies value inventories at net realizable value.Net Realizable ValueUsed when buying varying units in a single lump-sum purchase.Valuation BasesLO 3 Explain when companies use the relative sales value method to value inventories.Relative Sales ValueE9-7: 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.Valuation BasesLO 3 Explain when companies use the relative sales value method to value inventories.E9-7 (Relative Sales Value Method - Solution)x=x==xGenerally 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 losses in the period during which such declines in market prices take place.Valuation BasesLO 4 Discuss accounting issues related to purchase commitments.Purchase CommitmentsValuation BasesLO 4 Discuss accounting issues related to purchase commitments.Illustration: St. Regis Paper Co. signed timber-cutting contracts to be executed in 2012 at a price of $10,000,000. Assume further that the market price of the timber cutting rights on December 31, 2011, dropped to $7,000,000. St. Regis would make the following entry on December 31, 2011.Unrealized Holding Gain or Loss—Income 3,000,000 Estimated Liability on Purchase Commitments 3,000,000Valuation BasesLO 4 Discuss accounting issues related to purchase commitments.Illustration: When St. Regis cuts the timber at a cost of $10 million, it would make the following entry.Purchases (Inventory) 7,000,000Estimated Liability 3,000,000 Cash 10,000,000If Congress permitted St. Regis to reduce its contract price and therefore its commitment by $1,000,000. Estimated Liability 1,000,000 Unrealized Holding Gain or Loss—Income 1,000,000Relies on Three Assumptions:Gross Profit MethodLO 5 Determine ending inventory by applying the gross profit method.Substitute Measure to Approximate InventoryBeginning inventory plus purchases equal total goods to be accounted for.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.Gross Profit MethodLO 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 9-13Gross Profit MethodLO 5 Determine ending inventory by applying the gross profit method.Computation of Gross Profit PercentageIllustration 9-16E9-12: 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.Gross Profit MethodLO 5 Determine ending inventory by applying the gross profit method.E9-12 (Solution):(a) Compute the estimated inventory assuming gross profit is 25% of sales.Gross Profit MethodLO 5 Determine ending inventory by applying the gross profit method.(b) Compute the estimated inventory assuming gross profit is 25% of cost.Gross Profit MethodLO 5 Determine ending inventory by applying the gross profit method.25%100% + 25%= 20% of salesE9-12 (Solution):Disadvantages:Gross Profit MethodLO 5 Determine ending inventory by applying the gross profit method.Evaluation:Provides an estimate of ending inventory.Uses past percentages in calculation.A blanket gross profit rate may not be representative.Only acceptable for interim (generally quarterly) reporting purposes.Retail Inventory MethodLO 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.the total cost and retail value of goods purchased, the total cost and retail value of the goods available for sale, and the sales for the period.Requires retailers to keep: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 2011.Retail Inventory MethodInstructions: Prepare a schedule computing estimate retail inventory using the following methods: (1) Cost(2) LCM(3) LIFO (appendix)LO 6 Determine ending inventory by applying the retail inventory method.Retail Inventory - Cost MethodLO 6 Determine ending inventory by applying the retail inventory method.=/Retail Inventory - LCM MethodLO 6 Determine ending inventory by applying the retail inventory method.=/Retail Inventory - LIFO MethodLO 8 Determine ending inventory by applying the LIFO retail inventory methods.=/=/Appendix 9ASpecial ItemsRetail Inventory MethodLO 6 Determine ending inventory by applying the retail inventory method.Freight costsPurchase returnsPurchase discounts and allowancesTransfers-inNormal spoilageAbnormal shortagesEmployee discountsWidely used for the following reasons:Evaluation:to permit the computation of net income without a physical count of inventory, as a control measure in determining inventory shortages, in regulating quantities of merchandise on hand, and for insurance information.Retail Inventory MethodLO 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.Accounting standards require disclosure of:Presentation and AnalysisLO 7 Explain how to report and analyze inventory.Presentation:composition of the inventory, financing arrangements, and costing methods employed.Common ratios used in the management and evaluation of inventory levels are inventory turnover and average days to sell the inventory.Analysis:Measures the number of times on average a company sells the inventory during the period. Presentation and AnalysisLO 7 Explain how to report and analyze inventory.Inventory Turnover RatioIllustration 9-26Measure represents the average number of days’ sales for which a company has inventory on hand.Presentation and AnalysisLO 7 Explain how to report and analyze inventory.Average Days to Sell Inventory365 days / 7.5 times = every 48.7 daysAverage Days to SellIllustration 9-26U.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.LO 8 Determine ending inventory by applying the LIFO retail methods.Primary reason to use LIFOTax advantages.Results in a better matching of costs and revenues.The use of LIFO retail is made under two assumptions: stable prices and fluctuating prices.LO 8 Determine ending inventory by applying the LIFO retail methods.Stable Prices—LIFO Retail MethodA 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.LO 8 Determine ending inventory by applying the LIFO retail methods.ILLUSTRATION 9A-1LIFO Retail Method—Stable PricesLO 8 Determine ending inventory by applying the LIFO retail methods.ILLUSTRATION 9A-2Ending Inventory at LIFO Cost, 2010—Stable PricesInventory is composed of two layers.Solution on notes pageLO 8 Determine ending inventory by applying the LIFO retail methods.ILLUSTRATION 9A-3Ending Inventory at LIFO Cost, 2011—Stable PricesAssume that the ending inventory for 2011 at retail is $50,000. Notice that the 2010 layer is reduced from $11,000 to $5,000.Solution on notes pageLO 8 Determine ending inventory by applying the LIFO retail methods.Fluctuating Prices—Dollar-Value LIFO RetailIf the price level does change, the company must eliminatethe price change so as to measure the real increase in inventory, not the dollar increase.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 realincrease in inventory of $5,000 has occurred. Instead, the company must deflate the ending inventory at retail.Illustration 9A-4LO 8 Determine ending inventory by applying the LIFO retail methods.Illustration: Assume that the current 2010 price index is 112(prior year 100) and that the inventory ($56,000) has remained unchanged.Illustration 9A-5Dollar-Value LIFO RetailMethod—FluctuatingPricesLO 8 Determine ending inventory by applying the LIFO retail methods.Illustration: From this information, we compute the inventory amount at cost:Illustration 9A-6Hernandez must restate layers of a particular year to the prices in effect in the year when the layer was added.LO 8 Determine ending inventory by applying the LIFO retail methods.Illustration 9A-7Comparison of Effect of Price AssumptionsLO 8 Determine ending inventory by applying the LIFO retail methods.Illustration: Using the data from the previous example, assume that the retail value of the 2011 ending inventory at current prices is $64,800, the 2011 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-8Subsequent Adjustments under Dollar-Value LIFO RetailLO 8 Determine ending inventory by applying the LIFO retail methods.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-9Subsequent Adjustments under Dollar-Value LIFO RetailLO 8 Determine ending inventory by applying the LIFO retail methods.Changing from Conventional Retail to LIFOIllustration: Clark Clothing Store employs the conventional retail method but wishes to change to the LIFO retail method beginning in 2010. The amounts shown by the firm’s books are as follows.Conventional RetailInventory MethodIllustration 9A-10Illustration 9A-11Clark Clothing can then quickly approximate the ending inventory for 2010 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 2011.LO 8 Determine ending inventory by applying the LIFO retail methods.Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. 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