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by: Arturo Hilll IV


Arturo Hilll IV
GPA 3.96

J. Holmes

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J. Holmes
Class Notes
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This 20 page Class Notes was uploaded by Arturo Hilll IV on Tuesday October 13, 2015. The Class Notes belongs to ACCT 3001 at Louisiana State University taught by J. Holmes in Fall. Since its upload, it has received 27 views. For similar materials see /class/223061/acct-3001-louisiana-state-university in Accounting at Louisiana State University.




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Date Created: 10/13/15
CHAPTER 9 INVENTORIES PART II 1 Lower of Cost or Market 2 Valuation Bases 3 Gross Profit Method 4 Presentation and Analysis 1Lower of Cost or Market LCM A company abandons the historical cost principle when the future utility revenueproducing ability of the asset drops below its original cost Market Replacement Cost in y Pam Lower of Cost or Replacement Cost W 15quot Loss should be recorded when loss occurs not in the period of sale Conservatism given a choice between two accounting methods choose the one that understates assets and earnings and overstates liabilities and losses Ceiling and Floor Why use Replacement Cost RC for Market Decline in the RC usually decline in selling price RC allows a consistent rate of gross profit 0 If reduction in RC fails to indicate reduction in utility then two additional valuation limitations are used Ceiling net realizable value defined as estimated selling price of inventory less normal selling costs completion costs and disposal costs and Floor net realizable value less a normal profit margin CHAPTER 9 INVENTORIES PART II CHAPTER 9 INVENTORIES PART II Laptor What is the rationale for Ceiling and Floor limitations Yl Cost Market 737 Rationale for Limits galls 3 OHM quot V m5 239 T Replacement 57 SJ Cost lt Not lt Floor NRV Ago less Normal g5 k Profit Margin ga WWWKQA mil mm V1 3 WV Ceiling prevents overstatement of the value of obsolete damaged or shopworn inventories Floor deters understatement of inventory and overstatement of the loss in the current period CHAPTER 9 INVENTORIES PART II CHAPTER 9 INVENTORIES PART II Class Example Lower of Cost or Market Brown Company carries four items in inventory The following data is available about the items in inventory as of December 31 2004 Determine the proper inventory value using the lower ofcostormarket method on a an itembyitem basis and b a total inventory basis In each instance make any necessary journal entries QQvfih xfl ma a vanquot 44 4x32 a aof l i a a 3 y U I y l Oilkziflfzjit3 I i f 6 2 1 fa W2 A x 3 C yo Emma 9951 lt 04 dEG QlOO Q10 R L w F rMv Harm ma MOO W l Ou loo gho V xi 3 911 gt 1111 d WIL M Cost 93 ch 36quot unyvj QQOG g O Laalias l Eye we Um l WOO 3550 2 g M00 U 9375 HOGr M 3222 v P l f xy 0 23an EOQO 2QlOO W00 2 ig x Ll wk 015 a gagrg CHAPTER 9 INVENTORIES PART II a zzPm ii Cog r Q6361 Lama 3 0 XN K 3 Llama am rg i EG CHAPTER 9 INVENTORIES PART II Balance Sheet Presentation quot39 Current Assets Cash 100000 100000 Accounts Receivable 350 000 Direct Prepai expense Total current assets 1175000 1175000 Income Statement Presentation quot39 Direct Sales 300000 300000 Operating expenses Selling 45000 45000 General and administrative 20000 20000 Total operating expenses 65000 65000 Other revenue and expense aa 39 quot Income rom opera Ions 000 Income tax expense 16500 Net income 38500 Evaluation of LCM Rule Deficiencies o ExpenSe recorded when loss in utility occurs Profit on sale recognized at the point of sale lack of matching Inventory valued at cost in one year and at market in the next year IhCO SS39fenf Net income in year of loss is lower Net income in subsequent period may be higher than normal it expected reductions in sales price do not materialize unpredl39ctabe LCM uses a normal profitquot in determining inventory values which is a subje Ow V0 92515 s CHAPTER 9 INVENTORIES PART II dcr 2 Vlllluation Bases mm lg L Cm a Net Realizable Value I we a Permitted by GAAP under the followinglconditions 1 a controlled market with a quoted price applicable to all quantities and 2 no significant costs of disposal rare metals and agricultural products or 3 too difficult to obtain cost figures meatpacking Noam mate USij b Relative Sales Value Method l l 0 Used when buying varying units in a single lumpsum purchase 3mg w E9 7 The ABC Realty Corporation purchased a tract of unimproved land for 60000 This land was improved and subdivided into MW an addll39lonal cost of 36970 These building lots were all of the same size but owing to differences in location were offered for sale at different prices as follows Operating expenses allocated to this project total 35800 Required calculate the net income realized on this operation to date l l a Group No Price per Lot Lots Unsold U3 Lots end 1 15 5000 LO of at Year 53 g 6 7 2 9 3000 4 3 16 6000 4 J 2 Tor oat mace 35 5 gm 70 CHAPTER 9 INVENTORIES PART II Group Lots X Selling Relative Cost Cost Sold Price Price Sales Value Allo lot P v 1quotquot lt IfLot X Total cated COST guy gl 75000193000 e MAE 15 5000 75000 X 96970 36731 2449 2 A 52700 39 OT apoo E82993 WW 3 i ng 52 J A a9 Jiuuxl aulxm 5ng WOW 198 000 9 Group Lots X Total Sales CostLot Total Sold Price COGS Lot 1 8 5000 40000 2449 M 9qu 6 quot5060 st 16 3 I w P a A ll 5 mgaloe lww wequot 34913 A 3 quoteat6 l r W gt26 mmwo 913303 Calculation of Net Income Sales 1amp7 a Cost of goods sold UCQ 205 Gross profit La H 7016 Operating Expenses 53334 632mm Net Income 2 33 CHAPTER 9 INVENTORIES PART II c Purchase Commitments Generally seller retains title to the merchandise a Buyer recognizes no asset or liability I o If material the buyer should disclose contract details in footnote amount if they are noncanceabe a Q o If the contract price is greater than the market price and t the buyer expects that losses will occur when the purchase is effected the buyer should recognize losses in the period during which such declines in market prices take place l 13 3 l is I Often used lit c rfrzwwurw 36ross Profit Method quot Substitute Measure to Approximate Inventory Relies on Following Assumptions 1 Beginning inventory plus purchases equal total goods to 7 be accounted for 2Goods not sold must be on hand 3The sales at cost eg cost of goods sold deducted from the sum of the opening inventory plus purchases equal ending inventory 4 Historical relationship between sales and COGS is usually sTable C Lmdia figwufpg aw1pjr g 39 g N PA i h 51 1 Lagkkl j Lugs CHAPTER 9 INVENTORIES PART II Class Example Gross Profit Method Barclay Company39s tea distribution center in Boston suffered severe fire damage on April 28 2004 You have been hired by Barclay to estimate the amount of fire loss for insurance purposes Barclay uses the perpetual inventory system and last conducted a physical count on M In 39s ledger you note the following ad m 9 ow HQ OO 9 13w Q r m 1 J 73 You also note that included in 3mm are 42000 of goodsin transit from a Supplier on April 28 that were shipped fob shi ping point The goods have not yet arrived 4 A S 41 4139 l F 11339 Required wryfilm in J 7 3 0 Compute the estimated loss using an historic gross profit ratio of Q igf net sales I A Bea lw quotair Maui i3rltie Cages 30 EFlaapce Q u b ii mgiggg Met Sales F GP 1 I Vl 5 4xquot M as 2 z m 100950 Q50 U qibiguu quotoiliayjetbu peri acxolio 6 3095000 305 We 501 11 CHAPTER 9 INVENTORIES PART II CHAPTER 9 INVENTORIES PART II CHAPTER 9 INVENTORIES PART II 5933 ffx aza b CompuTe The esTimaTed loss using The currenT year 3 markup over cosT of goods sold of 36 1d Mai Trev Ems COGS QHQOEOCO 3 Vigil x mg n 6 7 A 699qu 2322 L1Wi rimy Nil 4 v Which would you use To reporT The fire loss To The insurance company my ll iv x m whici exer is W09 mid YdTe CHAPTER 9 INVENTORIES PART II The Jon WebsTer Book Company losT some of iTs invenTory in a flood caused by a hurricane on SepTember 24 The company39s books disclosed The informaTion gt 936ch gt 75000 You deTermine ThaT The company hisTorically prices iTems by marking Them up over cosT by InspecTion of The sTore reveals ThaT merchandise wiTh ToTal sales value of 35000 remains undamaged aTTer The hurricane and damaged merchandise wiTh an original sales value of 18000 has a neT realizable value of 8400 Required CompuTe The amounT of The loss due To The hurricane assuming ThaT The company39s flood insurance covers 50 of Their invenTorx loss 6 l3 l l ln T lT iQr Kipp 2 335 3 fr 5 x T 13 ww purging 3g gt r Boga 6V6 WW TV fir quoti 1 i v 1 3quot 7 WONGJ 39 gmow Tamas man 00559 700093 l 1 xxx l w v wzw 39 will l agah 6V4 av Ufd il alfig yav w gjgv Ogg ch gf g aiv 200 28130 A giuog TATEOG Y r TA 2 3 r5 wwws grog grjfis39s CHAPTER 9 INVENTORIES PART II CHAPTER 9 INVENTORIES PART II Gross Profit Method Evaluation Disadvantages 1 Provides an estimate of ending inventory 2Uses past percentages in calculation 3A blanket gross profit rate may n9 be representative 4Only acceptable for interim enmy quarterly reporting purposes mm 912 Cm i Qwa 4r 4Presentation and Analysis va s a aurr wt a5 Presentation Accounting standards require disclosure of 1composition of the inventory Harv WCiil V digg 23quot 2financing arrangements and plwg ud 39 3costing methods empl yed my yawn how LC 1 139 K we ew fe33 Analysis Common ratios used in the management and evaluation of inventory levels are MW and average days to sell the inventory CHAPTER 9 INVENTORIES PART II Another Exercise Lower of Cost or Market Alpha Company sells four types of chairs A B C and D The following data is available about the chairs in inventory as of December 31 2004 Determine the proper inventory value using the lowerof cost ormarket method on a an itembyitem basis and b a total inventory Cost Price Pro t CHAPTER 9 INVENTORIES PART II ALPHA COMPANYLCM SOLUTION Item by Item Basis a b c d LCM Design Mkt Inventory Item Cost RC NRV NRVPM Value Value A 5000 4500 6500 4700 4700 4700 B 3000 3150 3900 3100 3150 3000 C 7800 7320 10320 7680 7680 7680 D 4920 5760 5520 5040 5520 4920 20720 21 050 20300 a A 050 X 10000 5000 B 060 X 50003000 C 065 X 12000 7800 D 082 X 6000 4920 b A 045 X 9000 4500 B 063 X 5000 3150 C 061 X 12000 7320 D 096 X 6000 5760 c A 070 005X 10000 6500 B 085007X 5000 3900 C 095009X 12000 10320 D 100008X 6000 5520 d A 070005 018X10000 4700 B 085007O16X 5000 3100 C 095009022X 12000 7680 D 100008008X 6000 5040 Allowance Method Dr Inventory Loss 2072020300 420 Allowance for Inventory 420 Direct Method Dr Cost of Goods Sold 420 Inventory 420 Total Inventory Basis Allowance Method Dr Inventory Loss 0 Allowance 0 W Dr CGS 0 Invento Note that under the total inventory basis Cost is less than Designated Market CHAPTER 9 INVENTORIES PART II Remember to 1 Read the textbook actively before each class or otherwise read after each lecture Make a list of questions to ask in class 2 After class do these problems a inclass problems from these notes b the Wiley Plus recommended assignments and c the extra exercises posted on Moadle 3 Prepare for the next quiz to be announced in class 4 Keep up with these assignments each week and try not to fall behind F W wmg TOY 93 w Qua I I a T r 0 am sure GUquot CQQQ 4 926556 Grog Pi ai r Kata W QM j R 57 L M1552 Na l39 nglr g 9 c3 QMMms 530 02 Nat 50kg 195 gt C S i w l W rig I L s 20


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