1. Inventory Valuation Issues
Sid Glandon, DBA, CPA
Assistant Professor of Accounting

2. Lower of Cost or Market Historical cost principle is violated
Conservative approach
Recognize loss in period incurred not the period that the sale is made
Designated market is
Replacement cost
but not more than the Net realizable value (ceiling),
or less than the Net realizable value less normal profit (floor)

3. Lower of Cost or Market Select the smaller of
Cost or designated market
If designated market, record the loss using the
Direct method
Charge to cost of goods sold
Indirect method
Charge to allowance to reduce inventory to market

5. Gross Profit Method of Estimating Inventory
Assumptions
Beginning inventory plus purchases equals goods available for sale
Goods not sold must be on hand
Goods available for sale less cost of goods sold (sales at cost) equals ending inventory

8. Retail Inventory Method
Used in retail
Assumes
High volume of sales
Different types of merchandise
Observable pattern between cost and prices
Determine ending inventory at retail
Convert to cost basis

10. Analysis of Inventory Inventory turnover ratio
Number of times on average the inventory was sold during the period
Calculated as
Cost of goods sold ÷ Average inventory