www.downloadslide.

com
424 Chapter 9 Inventories: Additional Valuation Issues

QUESTIONS
1. Where there is evidence that the utility of inventory Inventory, January 1, 2015 $ 400,000
goods, as part of their disposal in the ordinary course of Sales to February 10, 2015 1,950,000
business, will be less than cost, what is the proper account- Purchases to February 10, 2015 1,140,000
ing treatment? Freight-in to February 10, 2015 60,000
Rate of gross profit on selling price 40%
2. Why are inventories valued at the lower-of-cost-or-net
realizable value (LCNRV)? What are the arguments against
the use of the LCNRV method of valuing inventories? What is the approximate inventory on February 10, 2015?
3. What approaches may be employed in applying the LCNRV 14. What conditions must exist for the retail inventory method
procedure? Which approach is normally used and why? to provide valid results?
4. In some instances, accounting principles require a depar- 15. The conventional retail inventory method yields results
ture from valuing inventories at cost alone. Determine the that are essentially the same as those yielded by the
proper unit inventory price in the following cases. LCNRV method. Explain. Prepare an illustration of
how the retail inventory method reduces inventory to
market.
Cases
16. (a) Determine the ending inventory under the conven-
1 2 3 4 5 tional retail method for the furniture department of
Cost €15.90 €16.10 €15.90 €15.90 €15.90 Mayron Department Stores from the following data
Sales value 14.80 19.20 15.20 10.40 17.80 (amounts in thousands). (Round to nearest percent.)
Estimated cost
to complete 1.50 1.90 1.65 .80 1.00
Estimated cost to sell .50 .70 .55 .40 .60 Cost Retail
Inventory, Jan. 1 ¥ 149,000 ¥ 283,500
Purchases 1,400,000 2,160,000
5. What method(s) might be used in the accounts to record a Freight-in 70,000
loss due to a price decline in the inventories? Discuss. Markups, net 92,000
Markdowns, net 48,000
6. What factors might call for inventory valuation at net Sales 2,175,000
realizable value?
7. Briefly describe the valuation of (a) biological assets and
(b) If the results of a physical inventory indicated an in-
(b) agricultural produce.
ventory at retail of ¥295,000, what inferences would
8. Under what circumstances is relative standalone sales you draw?
value an appropriate basis for determining the price as-
17. Tesco (GBR) reported inventory in its statement of finan-
signed to inventory?
cial position as follows:
9. At December 31, 2015, Ashley Co. has outstanding pur-
Inventories £2,430,000,000
chase commitments for purchase of 150,000 gallons, at
£6.20 per gallon, of a raw material to be used in its manu- What additional disclosures might be necessary to present
facturing process. The company prices its raw material the inventory fairly?
inventory at cost or net realizable value, whichever is 18. Of what significance is inventory turnover to a retail store?
lower. Assuming that the market price as of December 31,
2015, is £5.90, how would you treat this situation in the 19. Briefly describe some of the similarities and differences be-
accounts? tween U.S. GAAP and IFRS with respect to the accounting
for inventories.
10. What are the major uses of the gross profit method?
20. LaTour Inc. is based in France and prepares its financial
11. Distinguish between gross profit as a percentage of cost and statements in accordance with IFRS. In 2015, it reported
gross profit as a percentage of sales price. Convert the fol- cost of goods sold of €578 million and average inventory
lowing gross profit percentages based on cost to gross profit of €154 million. Briefly discuss how analysis of LaTour’s
percentages based on sales price: 25% and 331⁄3%. Convert inventory turnover (and comparisons to a company using
the following gross profit percentages based on sales price U.S. GAAP) might be affected by differences in inventory
to gross profit percentages based on cost: 331⁄3% and 60%. accounting between IFRS and U.S. GAAP.
12. Adriana Co. with annual net sales of $5 million maintains 21. Reed Pentak, a finance major, has been following global-
a markup of 25% based on cost. Adriana’s expenses aver- ization and made the following observation concerning
age 15% of net sales. What is Adriana’s gross profit and net accounting convergence: “I do not see many obstacles con-
profit in dollars? cerning development of a single accounting standard for
13. A fire destroys all of the merchandise of Assante Company inventories.” Prepare a response to Reed to explain the
on February 10, 2015. The following is information com- main obstacle to achieving convergence in the area of
piled up to the date of the fire. inventory accounting.