Professional Documents
Culture Documents
CH 09
CH 09
PREVIEW OF CHAPTER 9
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
9-2
9 Inventories: Additional
Valuation Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe and apply the lower-of- 5. Determine ending inventory by applying
cost-or-net realizable value rule. the gross profit method.
3. Explain when companies use the 7. Explain how to report and analyze
relative standalone sales value method inventory.
to value inventories.
4. Discuss accounting issues related to
purchase commitments.
9-3
LOWER-OF-COST-OR-NET REALIZABLE
VALUE (LCNRV)
9-4 LO 1
LCNRV
9-5 LO 1
LCNRV
9-6 LO 1
LCNRV ILLUSTRATION 9-3
Determining Final
Inventory Value
9-7 LO 1
LCNRV
9-8 LO 1
LCNRV
9-9 LO 1
Recording Net Realizable Value
9-10 LO 1
Recording Net Realizable Value
9-11 LO 1
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:
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
9-12
LCNRV
Use of an Allowance
Instead of crediting the Inventory account for net realizable
value adjustments, companies generally use an allowance
account.
Loss Method
9-13 LO 1
Use of an Allowance
9-14 LO 1
LCNRV
9-15 LO 1
Recovery of Inventory Loss
ILLUSTRATION 9-8
Effect on Net Income of Adjusting
Inventory to Net Realizable Value
9-16 LO 1
Evaluation of LCM Rule
Finished Desks A B C D
Catalog selling price € 500 € 540 € 900 € 1,200
FIFO cost per inventory list 12/31/15 470 450 830 960
Estimated cost to complete and sell 50 110 260 200
9-18 LO 1
LCNRV
P9-1: Remmers Company manufactures desks. Most of the
company’s desks are standard models and are sold on the basis of
catalog prices. At December 31, 2015, the following finished desks
appear in the company’s inventory.
Finished Desks A B C D
Catalog selling price € 500 € 540 € 900 € 1,200
FIFO cost per inventory list 12/31/15 470 450 830 960
Estimated cost to complete and sell 50 110 260 200
Net realizable value 450 430 640 1,000
Lower-of-cost-or-NRV 450 430 640 960
9-19 LO 1
9 Inventories: Additional
Valuation Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe and apply the lower-of-cost-or- 5. Determine ending inventory by applying
net realizable value rule. the gross profit method.
3. Explain when companies use the relative 7. Explain how to report and analyze
standalone sales value method to value inventory.
inventories.
4. Discuss accounting issues related to
purchase commitments.
9-20
VALUATION BASES
Agricultural assets
9-21 LO 2
Special Valuation Situations
9-22 LO 2
Special Valuation Situations
9-23 LO 2
Agricultural Accounting at NRV
9-24 LO 2
Agricultural Accounting at NRV ILLUSTRATION 9-9
Agricultural Assets—
Bancroft Dairy
9-25 LO 2
Agricultural Accounting at NRV
9-26 LO 2
Agricultural Accounting at NRV
Cash 38,500
Sales Revenue 38,500
Cost of Goods Sold 36,000
Inventory (milk) 36,000
9-27 LO 2
Special Valuation Situations
Primary purpose is to
9-28 LO 2
9 Inventories: Additional
Valuation Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe and apply the lower-of-cost-or- 5. Determine ending inventory by applying
net realizable value rule. the gross profit method.
2. Explain when companies value 6. Determine ending inventory by applying
inventories at net realizable value. the retail inventory method.
3. Explain when companies use the 7. Explain how to report and analyze
relative standalone sales value inventory.
method to value inventories.
4. Discuss accounting issues related to
purchase commitments.
9-29
VALUATION BASES
9-30 LO 3
VALUATION BASES ILLUSTRATION 9-10
Allocation of Costs,
Using Relative Standalone
Sales Value
ILLUSTRATION 9-11
Determination of Gross Profit,
Using Relative Standalone Sales Value
9-31 LO 3
9 Inventories: Additional
Valuation Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe and apply the lower-of-cost-or- 5. Determine ending inventory by applying
net realizable value rule. the gross profit method.
2. Explain when companies value 6. Determine ending inventory by applying
inventories at net realizable value. the retail inventory method.
3. Explain when companies use the relative 7. Explain how to report and analyze
standalone sales value method to value inventory.
inventories.
9-33 LO 4
Purchase Commitments
9-34 LO 4
Purchase Commitments
9-35 LO 4
9 Inventories: Additional
Valuation Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe and apply the lower-of-cost- 5. Determine ending inventory by
or-net realizable value rule. applying the gross profit method.
2. Explain when companies value 6. Determine ending inventory by applying
inventories at net realizable value. the retail inventory method.
3. Explain when companies use the 7. Explain how to report and analyze
relative standalone sales value method inventory.
to value inventories.
4. Discuss accounting issues related to
purchase commitments.
9-36
GROSS PROFIT METHOD OF
ESTIMATING INVENTORY
9-37 LO 5
GROSS PROFIT METHOD
ILLUSTRATION 9-13
Application of Gross Profit Method
9-38 LO 5
GROSS PROFIT METHOD
ILLUSTRATION 9-14
Computation of Gross
Profit Percentage
9-39 LO 5
GROSS PROFIT METHOD Illustration 9-15
Formulas Relating
to Gross Profit
Illustration 9-16
Application of
Gross Profit
Formulas
9-40
GROSS PROFIT METHOD
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.
9-41 LO 5
GROSS PROFIT METHOD
(a) Compute the estimated inventory at May 31, assuming that the
gross profit is 25% of sales.
9-42 LO 5
GROSS PROFIT METHOD
(b) Compute the estimated inventory at May 31, assuming that the
gross profit is 25% of cost.
9-43 LO 5
GROSS PROFIT METHOD
9-44 LO 5
WHAT’S YOUR PRINCIPLE
THE SQUEEZE
Managers and analysts closely follow gross As another example, Debenham (GBR),
profits. A small change in the gross profit the second largest department store in the
rate can significantly affect the bottom line. United Kingdom, experienced a 14
For example, at one time, Apple Computer percentage share price decline. The
(USA) suffered a textbook case of shrinking cause? Markdowns on slow-moving
gross profits. In response to pricing wars in inventory reduced its gross margin. On the
the personal computer market, Apple had positive side, an increase in the gross profit
to quickly reduce the price of its signature rate provides a positive signal to the
Macintosh computers—reducing prices market. For example, just a 1 percent boost
more quickly than it could reduce its costs. in Dr. Pepper’s (USA) gross profit rate
As a result, its gross profit rate fell from 44 cheered the market, indicating the
percent in 1992 to 40 percent in 1993. company was able to avoid the squeeze of
Though the drop of 4 percent seems small, increased commodity costs by raising its
its impact on the bottom line caused prices.
Apple’s share price to drop from $57 per Sources: Alison Smith, “Debenham’s Shares
share to $27.50 in just six weeks. Hit by Warning,” Financial Times (July 24,
2002), p. 21; and D. Kardous, “Higher Pricing
Helps Boost Dr. Pepper Snapple’s Net,” Wall
Street Journal Online (June 5, 2008).
9-45 LO 5
9 Inventories: Additional
Valuation Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe and apply the lower-of-cost- 5. Determine ending inventory by applying
or-net realizable value rule. the gross profit method.
2. Explain when companies value 6. Determine ending inventory by
inventories at net realizable value. applying the retail inventory
3. Explain when companies use the method.
relative standalone sales value method
7. Explain how to report and analyze
to value inventories.
inventory.
4. Discuss accounting issues related to
purchase commitments.
9-46
RETAIL INVENTORY METHOD
2) Total cost and retail value of the goods available for sale.
Methods
Conventional Method (or LCNRV)
Cost Method
9-47 LO 6
RETAIL INVENTORY METHOD
Illustration: The following data pertain to a single department for
the month of October for Fuque Inc. 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
9-48 LO 6
RETAIL INVENTORY METHOD
9-49 LO 6
RETAIL INVENTORY METHOD
9-50 LO 6
RETAIL INVENTORY METHOD
Employee discounts
9-51 LO 6
RETAIL INVENTORY METHOD
Special
Items
ILLUSTRATION 9-22
Conventional Retail
Inventory Method—
Special Items Included
9-52 LO 6
RETAIL INVENTORY METHOD
4) Insurance information.
9-53 LO 6
9 Inventories: Additional
Valuation Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe and apply the lower-of-cost- 5. Determine ending inventory by applying
or-net realizable value rule. the gross profit method.
2. Explain when companies value 6. Determine ending inventory by applying
inventories at net realizable value. the retail inventory method.
3. Explain when companies use the 7. Explain how to report and analyze
relative standalone sales value method inventory.
to value inventories.
4. Discuss accounting issues related to
purchase commitments.
9-54
PRESENTATION AND ANALYSIS
Presentation of Inventories
Accounting standards require disclosure of:
1) Accounting policies adopted in measuring inventories,
including the cost formula used (weighted-average, FIFO).
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.
9-56 LO 7
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.
9-57 LO 7
PRESENTATION AND ANALYSIS
Inventory Turnover
Measures the number of times on average a company sells
the inventory during the period.
Illustration: In its 2013 annual report Tate & Lyle plc (GBR)
reported a beginning inventory of £450 million, an ending inventory
of £510 million, and cost of goods sold of £2,066 million for the
year.
Illustration 9-25
9-58 LO 7
PRESENTATION AND ANALYSIS
9-59 LO 7
GLOBAL ACCOUNTING INSIGHTS
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.
9-60
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.
9-61
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.
9-62
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.
9-63
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.
9-64
GLOBAL ACCOUNTING INSIGHTS
9-65
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.
9-66
COPYRIGHT
Copyright © 2014 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. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
9-67