1. CHAPTER 9 Inventories: Additional Valuation Issues ……..…………………………………………………………...  basis for valuation of inventory  “lower of cost or the cost to replace”  matching principle; conservatism Lower of Cost or Market

2.  always pick the middle value Designated Market Value Ceiling = net realizable value (selling price less cost of completion) Floor =net realizable value less normal profit margin replacement cost 1 2 3

3. Methods of Applying Lower of Cost or Market  directly to each item  to each category  to the total inventory Frozen Spinach$80,000$104,000 Carrots100,00090,000 Cut beans 50,000 40,000 Total frozen$230,000$234,000 Canned Peas$90,000$48,000 Mixed veget 95,000 92,000 Total canned$185,000$140,000 Total$415,000$374,000

4. Recording Inventory at Market Direct Method (w/ periodic inventory) Merch Inv 5,800 62,400 Purchases 0 CGS 0  Beg Inventory: $6,000 cost, $5,800 market  End Inventory: $6,300 cost, $5,700 market

5. Allowance Method (w/ periodic inventory) To adjust inventory and record CGS: Merch Inv 6,000 62,400 Allow to Inv 200 Purchases 0 CGS 0 To adjust inventory and record CGS:

6. Direct Method CGS 0 62,500 Allowance Method CGS 0 62,100 Allow to Inv 200 400 600 Merch Inv 5,800 5,700 Merch Inv 6,000 6,300 Loss: decline 0 400

7. VALUATION BASES Valuation at Net Realizable Value  permitted in some cases  certain minerals and agricultural products  even if NRV is above cost Purchase Commitments  agreement to buy inventory in the future  no asset or liability is recorded  loss recorded if market price drops below contract price

8. Valuation Using Relative Sales Value Cashews Cashew pieces Qnty 5 tons 8 tons Sales Price / lb $4.00 $2.20 Relative Sales Price Allocate $50,000 cost of production to joint products. Total Sales Price $40,000 $35,200 $75,200 Cost Allocated $50,000

9. GROSS PROFIT METHOD ( ESTIMATING INVENTORY ) Sales$780,000 Cost of Sales Beg inventory$ 34,000 Purchases 599,000 Goods available$633,000 End inventory. Cost of Goods Sold. Gross Profit Unknown Estimate this and work backwards. 25%

10. CostRetail Beg inventory$ 300$ 600 Purchases 3,200 6,000 Goods available$3,500$6,600 Add: Markups. 600 Adj. goods avail$3,500$7,200 Sales 5,800 End inventory @ retail$1,400 End inventory @ cost RETAIL INVENTORY METHOD

11. 11/1Purchase 10 units$60$100 Purchases @ Cost Purchases @ Retail Sales @ Retail 11/10Sell 8 units$80 11/15Purchase 10 units$70$100 11/25Sell 4 units$40 Ending inventory (8 units)

12. 11/1Purchase 10 units$60$100 Purchases @ Cost Purchases @ Retail Sales @ Retail 11/10Sell 8 units$80 11/15Purchase 10 units$70$100 11/25Sell 4 units$44 Ending inventory (8 units) 11/21Mark-up 12 units$12

13. 11/1Purchase 10 units$60$100 Purchases @ Cost Purchases @ Retail Sales @ Retail 11/10Sell 8 units$80 11/15Purchase 10 units$70$100 11/25Sell 4 units$32 Ending inventory (8 units) 11/21Mark-down 12 units($24)

14. CostRetail Beg inventory$ 300$ 600 Purchases 3,200 6,000 Goods available$3,500$6,600 Deduct: Markdowns. 700 Adj. goods avail$3,500$5,900 Sales 4,800 End inventory @ retail$1,100 End inventory @ cost

15. Conventional Retail Inventory Method  Adjust the price of goods available by  adding markups  subtracting markdowns  Use the price after markups but before markdowns to determine the cost-to-retail ratio Special Items  Purchase returns: adjust both cost and retail value  Purchases discounts: adjust cost only  Sales net of returns but not net of discounts

16. Purchase returns Purchases @ Cost Purchases @ Retail Sales @ Retail Sales returns & allow Purchase discounts Sales discounts Freight costs Employee discounts Shortages (breakage, theft) Sales & Shortages Ending Inventory

17. INVENTORY DISCLOSURE AND ANALYSIS  Required inventory disclosures  composition  financing arrangements  inventory valuation methods  Change in valuation method must be explained  Ratio for evaluating inventories: Inventory Turnover Cost of Goods Sold Average Inventory =