Prepared by

Coby Harmon
University of California, Santa Barbara Revised for 2601513
Westmont College
9-1
 Inventories: CHAPTER 9
Additional Valuation Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe and apply the lower- 4. Determine ending inventory
of-cost-or-net realizable value by applying the retail
rule. inventory method.
2. Identify other inventory 5. Explain how to report and
valuation issues. analyze inventory.
3. Determine ending inventory by
applying the gross profit
method.

9-2
 PREVIEW OF CHAPTER 9

มูลค่าบันทึกหรือที่แสดงในงบการเงินของ
Inventory คือต้นทุนของ Inventory Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
9-3
 ในกรณีที่ Inventory ด้อยค่า การใช้วิธี LCNRV ทำให้แสดงข้อมูลที่ more
relevent มากกว่า LEARNING OBJECTIVE 1
Lower-of-Cost-or-Net Describe and apply the lower-
of-cost-or-net realizable value
Realizable Value (LCNRV) rule.

A company abandons the historical cost principle when the

future utility (revenue-producing ability) of the asset drops
I NV

below its original cost.

f
10,000
f ปกติ มูลค่าที่เราบันทึก Inventory ซึ่งเป็นต้นทุนสินค้า
mm
ควรที่จะแสดงในงบการเงินเลย แต่ ตามมาตรฐานบัญชี
cost
ยังแสดงไม่ได้ต้องเปรียบเทียบกับ net realizable
Net Realizable Value value (NRV) --> ต้องแสดงค่าที่ต่ำกว่าเพื่อสะื้อนการ
ใช้ประโยชน์จาก invemtory นั้นได้จริง

Estimated selling price in the normal course of business less

ต้นทุนที่ใช้ผลิตจนเสร็จ มีเฉพาะธุรกิจผลิตที่มีงานระหว่างทำ (Work in Process)
estimated costs to complete and
คชจ ในการขาย ตัวอย่าง ต้นทุนสินค้า 10,000 บาท
Case 1: ราคาขาย 15000 คชจขาย = 500
estimated costs to make a sale. NRV = 14,500
NRV = ราคาขายของสินค้า ปกติ-cost to complete- cost to make a sales Case2: ราคาขาย 8000 คชจขาย = 300
NRV = 8000-300 = 7,700 (สินค้าด้อยค่า)
9-4 LO 1
 Net Realizable Value

Illustration: Assume that Mander AG has unfinished inventory with

Sale Value (ราคาขาย) ไม่จำเป็นต้องเท่ากับราคาตลาด อ้างอิงราคาที่เราขายจริง
a cost of €950, a sales value of €1,000, estimated cost of
completion of €50, and estimated selling costs of €200. Mander’s
net realizable value is computed as follows.

NRV ต่ำกว่า จึงบันทึก Inventory = NRV จึงต้อง Write down ให้เหลือ 750
ILLUSTRATION 9.1
Computation of Net Realizable Value

9-5 LO 1
 Net Realizable Value ILLUSTRATION 9.1
Computation of Net
Realizable Value

Mander reports inventory on its balance sheet at €750.

In its income statement, Mander reports a Loss on

Inventory Write-Down of €200 (€950 − €750).

9-6 LO 1
 Net Realizable Value

ILLUSTRATION 9.2
LCNRV Disclosures

9-7 LO 1
 Illustration of LCNRV
Jinn-Feng Foods computes its inventory
at LCNRV (amounts in thousands). ILLUSTRATION 9.3
Determining Final
Inventory Value
INV ← ITEM T -
account no, inventory is

415,000
V18
nineveh
Compare Inventory
เป็น Individual Item

จำนวนแต่ละ item
แสดงใน Stock
Card (เรียก บช (เลือก NRV)
ย่อย) ซึ่งจะแสดง
ต้นทุนที่เปรียบเทียบ (เลือก NRV)
กับมูลค่า NRV แล้ว (เลือก NRV)

415,000 ต้องwrite down ออก

(415,000-384,000)

9-8 LO 1
 Methods of Applying LCNRV
Assume that Jinn-Feng Foods separates its food
products into two major groups, frozen and canned.

บริษัทส่วนใหญ่ใช้ Individual
Compare Inventory COST NRV
เป็น group
---------- --------- )
จากหน้า 9-8

ILLUSTRATION 9.4
Alternative Applications of LCNRV Individual ต่ำกว่า Group

9-9 LO 1
 Methods of Applying LCNRV Individual VS Major Group

In most situations, companies price inventory on an item-

by-item basis.

Tax rules in some countries require that companies use an

individual-item basis.

Individual-item approach gives the lowest valuation for

statement of financial position purposes. Individual ได้ต่ำกว่า Group
ถ้าเลือกใช้วิธีไหนต้องใช้ตลอด แต่ถ้าต้องการเปลี่ยนวิธียันทึกก็ต้องเปิดเผลในหมายเหตุและมีเหตุผลประกอบ
Method should be applied consistently from one period to
เพื่อให้เปรียบเทียบข้อมูลระหว่างปี และระหว่างบริษัทได้
another.

ข้อมูลบัญชีที่ดีต้อง
1) More relevant
2) consistently โดยวิธีที่กิจการเลือกใช้ต้องเปิดเผลในหมายเหตุประกอบงบการเงิน

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 การบันทึก Write down
Recording NRV Instead of Cost

Illustration: Data for Ricardo SpA

Cost of goods sold (before adj. to NRV) €108,000
Ending inventory (cost) 82,000
Ending inventory (at NRV) 70,000
write down ได้ 2 แบบ ดู Slide 14 ต่อ
ขาดทุนจาก...
Loss Loss Due to Decline to NRV 12,000
Method Inventory (€82,000 - €70,000) 12,000
**ในความเป็นจริงต้องเราไม่ได้หักบัญชี Inventory โดยตรงแต่จะ Cr. Allowance to
reduce inventory to NRV (เป็นบัญชีปรับมูลค่าของ Inventory) => Slide 9-14
ต้นทุนขาย
COGS Cost of Goods Sold 12,000
2
Method Inventory 12,000

9-11 LO 1
 Recording NRV Instead of Cost

Partial Statement of Financial Position

Loss COGS
Method Method
Current assets:
Inventory € 70,000 € 70,000
Prepaids 20,000 20,000
Accounts receivable 350,000 350,000
Cash 100,000 100,000
Total current assets 540,000 540,000

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 Recording Net Realizable Value
Loss COGS
Income Statement Method Method
Sales € 200,000 € 200,000 *

Cost of goods sold 108,000 120,000

Gross profit 92,000 80,000
Operating expenses:
Selling 45,000 45,000
General and administrative 20,000 20,000
Total operating expenses 65,000 65,000
Other income and expense:
ขาดทุนจากการลดลงของinvtory ตาม NRV
Loss due to decline of inventory to NRV 12,000 -
Interest income 5,000 5,000
Total other (7,000) 5,000
Income from operations 20,000 20,000
Income tax expense 6,000 6,000
Net income € 14,000 € 14,000
9-13
**มาตรฐานการบัญชีไทย แนะนำให้ write down เป็น COGs แต่ไม่ได้บังคับ
 Use of an Allowance การบันทึก Write down

Instead of crediting the Inventory account for NRV adjustments,

companies generally use an allowance account, often referred to
as Allowance to Reduce Inventory to NRV.

Using an allowance account under the loss method, Ricardo SpA

makes the following entry to record the inventory write-down to
NRV.

Loss Due to Decline of Inventory to NRV 12,000

Allowance to Reduce Inventory to NRV 12,000
ILLUSTRATION 9-7

9-14 LO 1
 Use of an Allowance

Partial Statement of Financial Position

No
Allowance Allowance
Current assets:
Inventory € 70,000 € 82,000
Allowance to reduce inventory (12,000)
Inventory at NRV 70,000
Prepaids 20,000 20,000
Accounts receivable 350,000 350,000
Cash 100,000 100,000
Total current assets 540,000 540,000

9-15 LO 1
 LCNRV สินค้าคงเหลือกลับมามีมูลค่า

Recovery of Inventory Loss

การล้าง Allowance ออก เนื่องจากสินค้ากลับมามีค่า
Amount of write-down is reversed.

Reversal limited to amount of original write-down.

Continuing the Ricardo example, assume the net realizable

value increases to €74,000 (an increase of €4,000). Ricardo
makes the following entry, using the loss method.

Allowance to Reduce Inventory to NRV 4,000

Recovery of Inventory Loss บช รายได้ 4,000

9-16 LO 1
✗Recovery of Inventory Loss offers

Allowance account is adjusted in subsequent periods, such

that inventory is reported at the LCNRV.
Illustration shows net realizable value evaluation for Vuko Company
and the effect of net realizable value adjustments on income.

ILLUSTRATION 9.8
Effect on Net Income of Adjusting
Inventory to Net Realizable Value

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 LCNRV Alot
✗
P9.1: Remmers SE manufactures desks. The 2019 catalog was in
effect through November 2019, and the 2020 catalog is effective as of
December 1, 2019. At December 31, 2019, the following finished
desks appear in the company’s inventory.

Finished Desks A B C D
2019 Catalog selling price € 450 € 480 € 900 € 1,050
FIFO cost per inventory list 12/31/19 470 450 830 960
Estimated cost to (complete and) sell 50 110 260 200
2020 catalog selling price 500 540 900 1,200

Instructions: At what amount should the four desks appear in the

company’s December 31, 2019, inventory, assuming that the company
has adopted a lower-of-FIFO-cost-or-net realizable value approach for
valuation of inventories on an individual-item basis?
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 ✗LCNRV Atos
Instructions: At what amount should the four desks appear in the
company’s December 31, 2019, inventory, assuming that the company
has adopted a lower-of-FIFO-cost-or-net realizable value approach for
valuation of inventories on an individual-item basis?

Finished Desks A B C D
2019 Catalog selling price € 450 € 480 € 900 € 1,050
FIFO cost per inventory list 12/31/19 470 450 830 960
Estimated cost to (complete and) sell 50 110 260 200
2020 catalog selling price 500 540 900 1,200

Net Realizable Value € 450 € 430 € 640 € 1,000

Lower-of-Cost-or-NRV 450 430 640 960

9-19 LO 1
วิธีการประมาณ Inventory ในกรณีที่สินค้าเสียหายจนไม่สามารถตรวจ
นับได้เช่น น้ำท่วม ไฟไหม้ LEARNING OBJECTIVE 3
Gross Profit Method of Determine ending inventory by
applying the gross profit
Estimating Inventory method.

Substitute Measure to Approximate Inventory

ประมาณจากข้อมูล inventory ที่เคยบันทึกในอดีต
Relies on three assumptions: วิธีนี้ มาตรฐานบัญชีไม่ยอมรับใช้ในกิจการภายในเท่านั้น
แต่ยอมรับวิธี Retail Inventory Method (Slide 9-28)
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.

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 Gross Profit Method of Estimating Inventory

Illustration: Cetus SE 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.

Gross Profit = ขาย - COGS

70% of Sales = 100 - 30
COGs = 70%

ILLUSTRATION 9.13 ต้องการประมาณสินค้่าปลายงวด สมมติไฟไหม้โรงงาน ตรวจนับ Inventory หลังไฟไหม้

Application of Gross Profit Method ต้นทุนขาย = ต้นงวด + ซื้อเพิ่ม - ส/คปลายงวด
196,000 = 60,000 + 200,000 - ส/คปลายงวด ได้ 20,000 บาท ดังนั้นไฟไหม้ inventory = 44,000
ส/คปลายงวด = 64,000 (64,000-20,000)
9-21
70% x Sales ข้อมูลจากโจทย์ LO 3
 Gross Profit Method of Estimating Inventory

Computation of Gross Profit Percentage

Illustration: In Illustration 9.13, the gross profit was a given. But
how did Cetus derive that figure? To see how to compute a gross
profit percentage, assume that an article cost €15 and sells for
€20, a gross profit of €5.

ILLUSTRATION 9.14
Computation of Gross Profit Percentage

9-22 LO 3
 Gross Profit Method ILLUSTRATION 9.15
Formulas Relating to
Gross Profit

ILLUSTRATION 9.16
Application of Gross
Profit Formulas

9-23
 Gross Profit Method of Estimating Inventory

E9.14: Astaire ASA uses the gross profit method to estimate inventory
for monthly reporting purposes. Presented below is information for the
month of May.
Inventory, May 1 € 160,000 Sales € 1,000,000
Purchases (gross) 640,000 Sales returns 70,000
Freight-in 30,000 Purchases discounts 12,000

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.

9-24 LO 3
 Gross Profit Method of Estimating Inventory
(a) Compute the estimated inventory at May 31, assuming that the
gross profit is 25% of sales.

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

9-25 LO 3
 Gross Profit Method of Estimating Inventory
(b) Compute the estimated inventory at May 31, assuming that the
gross profit is 25% of cost.

Inventory, May 1 (at cost) € 160,000

Purchases (gross) (at cost) 640,000
25%
Purchase discounts = 20% of sales (12,000)
100% + 25%
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

9-26 LO 3
 Gross Profit Method of Estimating Inventory

Evaluation of Gross Profit Method

Disadvantages
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

because it provides only an estimate.

IFRS requires a physical inventory as additional verification of

the inventory indicated in the records.

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 มาตรฐานบัญชียอมรับวิธีนี้เป็นการประมาณมูลค่าสินค้าคงคลัง
But อาจารย์ไม่สอน LEARNING OBJECTIVE 4
Retail Inventory Method Determine ending inventory by
applying the retail inventory
method.

Method used by retailers to compile inventories at retail prices.

Retailer can use a formula to convert retail prices to cost.
Requires retailers to keep a record of:
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.

Methods
Conventional Method (or LCNRV)
Cost Method

9-28 LO 4
 Retail Inventory Method

Illustration: The following data pertain to a single department for the

month of October for Fuque Ltd. Prepare a schedule computing
retail inventory using the Conventional and Cost methods.

COST RETAIL
Beg. 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 and breakage 10,000
Sales 390,000
9-29 LO 4
 Retail Inventory Method

CONVENTIONAL Method: Cost to

COST RETAIL Retail %
Beginning inventory £ 52,000 £ 78,000
Purchases 272,000 423,000
Purchase returns (5,600) (8,000)
Freight in 16,600
Markups, net 7,000
Current year additions 283,000 422,000
Goods available for sale 335,000 500,000 67.0%
Markdowns, net (3,600)
Normal spoilage and breakage (10,000)
Sales (390,000)
Ending inventory at retail £ 96,400

Ending inventory at Cost:

£ 96,400 x 67.0% = £ 64,588

9-30 LO 4
 Retail Inventory Method

COST Method: Cost to

COST RETAIL Retail %
Beginning inventory £ 52,000 £ 78,000
Purchases 272,000 423,000
Purchase returns (5,600) (8,000)
Freight in 16,600
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 and breakage (10,000)
Sales (390,000)
Ending inventory at retail £ 96,400

Ending inventory at Cost:

£ 96,400 x 67.49% = £ 65,060

9-31 LO 4
 Retail Inventory Method

Special Items Relating to Retail Method

Freight costs
Purchase returns
Purchase discounts and allowances
Transfers-in
When sales are recorded
Normal shortages
gross, companies do not
Abnormal shortages recognize sales discounts.

Employee discounts

9-32 LO 4
ILLUSTRATION 9.22
Conventional Retail
Inventory Method—
Special Items Included

9-33
 Retail Inventory Method

Evaluation of Retail Inventory Method

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.

Some companies refine the retail method by computing inventory separately by

departments or class of merchandise with similar gross profits.

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 LEARNING OBJECTIVE 5
Presentation and Analysis Explain how to report and
analyze inventory.

Presentation of Inventories
Accounting standards require disclosure of:
1) Accounting policies adopted in measuring inventories,
including the cost formula used (weighted-average, FIFO).

2) Total carrying amount of inventories and the carrying

amount in classifications (merchandise, production supplies,
raw materials, work in progress, and finished goods).

3) Carrying amount of inventories carried at fair value less

costs to sell.

4) Amount of inventories recognized as an expense during the

period.
9-35 LO 5
 Presentation and Analysis

Presentation of Inventories
Accounting standards require disclosure of:
5) Amount of any write-down of inventories recognized as
an expense in the period and the amount of any reversal
of write-downs recognized as a reduction of expense in
the period.

6) Circumstances or events that led to the reversal of a

write-down of inventories.

7) Carrying amount of inventories pledged as security for

liabilities, if any.

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 Presentation and Analysis

Analysis of Inventories
Common ratios used in the management and evaluation of
inventory levels are inventory turnover and average days to
sell the inventory.

9-37 LO 5
 Analysis of Inventories
= ใน 1 ปี กิจการขาย inventory ไปกี่รอบ
Inventory Turnover
Measures the number of times on average a company sells
the inventory during the period.

Illustration: In its 2015 annual report Tate & Lyle plc (GBR)
reported a beginning inventory of £372 million, an ending inventory
363
of £263 million, and cost of goods sold of £1,319 million for the
year.

กิจการขายสินค้าใน
ILLUSTRATION 9.25
ปีนี้ไป 3.59 ครั้ง

9-38 LO 5
 Analysis of Inventories

Average Days to Sell Inventory

Measure represents the average number of days’ sales for
which a company has inventory on hand.
ILLUSTRATION 9.25

Average Days to Sell

365 days / 3.59 times = every 101.7 days

ระยะเวลาในการขายสินค้า 1 รอบ
9-39 * Inventory Day ยิ่งมากยิ่งไม่ดี แสดงว่าสินค้าขายช้า LO 5
 GLOBAL ACCOUNTING INSIGHTS

LEARNING OBJECTIVE 6
Compare the accounting for inventories under IFRS and U.S. GAAP.

Inventories
In most cases, IFRS and U.S. GAAP related to inventory are the same. The
major differences are that IFRS prohibits the use of the LIFO cost flow
assumption and records market in the LCNRV differently.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to inventories.
Similarities
• U.S. GAAP and IFRS account for inventory acquisitions at historical cost
and evaluate inventory for lower-of-cost-or-net realizable value (market)
subsequent to acquisition.
• Who owns the goods—goods in transit, consigned goods, special sales
agreements—as well as the costs to include in inventory are essentially
accounted for the same under U.S. GAAP and IFRS.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• U.S. GAAP provides more detailed guidelines in inventory accounting. The
requirements for accounting for and reporting inventories are more
principles-based under IFRS.
• A major difference between U.S. GAAP and IFRS relates to the LIFO cost
flow assumption. U.S. 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.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• In the lower-of-cost-or-market test for inventory valuation, U.S. 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 defines market as net realizable value and does not use a
ceiling or a floor to determine market.
• Under U.S. 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 up back 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.
9-43 LO 6
 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• IFRS requires both biological assets and agricultural produce at the point of
harvest to be reported at net realizable value. U.S. 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.

9-44 LO 6
 GLOBAL ACCOUNTING INSIGHTS

On the Horizon
One convergence issue that will be difficult to resolve relates to the use of the
LIFO cost flow assumption. As indicated, IFRS specifically prohibits its use.
Conversely, the LIFO cost flow assumption is widely used in the United States
because of its favorable tax advantages. In addition, many argue that LIFO
from a financial reporting point of view provides a better matching of current
costs against revenue and therefore enables companies to compute a more
realistic income.

9-45 LO 6
 Copyright

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9-46