中级财务会计英文ch05.ppt

1、,Inventories: Basic Valuation Methods selling price $30; cost to complete and dispose $4; and normal profit margin of $5. How would Diego value the inventory item on its Balance Sheet?,Lower of Cost or MarketExample,LCM,Lower of Cost or MarketExample,Current replacement cost of $21.50 falls between

2、the ceiling ($26.00) and the floor ($21.00), so current replacement cost becomes market for comparison with cost.,Lower of Cost or MarketExample,Market is $21.50 Cost is $20.00 Cost is below market, so the inventory item will be valued on the Balance Sheet at its historical cost of $20.00.,Lower of

3、Cost or MarketExample,Lets modify our original example by changing only the estimated selling price from $30.00 to $25.00. Remember, all other values remain the same. How would Diego value the inventory item on its Balance Sheet?,Lower of Cost or MarketExample,Replacement cost of $21.50 is above the

4、 ceiling. Replacement cost must fall between the ceiling and the floor. We select Ceiling ($21.00) as market.,Lower of Cost or MarketExample,Market is $21.00 Cost is $20.00 Cost is below market, so the inventory item will be valued at $20.00 on Diegos Balance Sheet.,Lower of Cost or MarketExample,Di

5、ego, Inc. has another inventory item currently carried at an historical cost of $95.00 per unit. At the Balance Sheet date the following per unit information is available: Current replacement cost $90.00; NRV of $100.00 and NRV reduced by normal profit of $70.00. How would Diego value this item on i

6、ts Balance Sheet?,Lower of Cost or MarketExample,Replacement Cost = $90.00,$100.00 Ceiling (NRV),$70.00 Floor,Because replacement cost falls between the ceiling and floor, replacement cost becomes market.,Lower of Cost or MarketExample,Market = $90.00,$100.00 Ceiling (NRV),$70.00 Floor,Cost = $95.00

7、,Because market is below cost, the item will be valued at $90.00 (market value).,Lower of Cost or MarketExample,Compare cost and market separately for each:,Item of Inventory,Class of inventory items,Application of LCM,Or you could compare,Total Cost,Total Market,For the entire inventory,Application

8、 of LCM,Inventory Cost Market,Category A: Item 1$1,000$ 700$ 700 Item 21,2001,3001,200 $2,200$2,000 Category B: Item 3$2,000$2,4002,000 Item 42,5002,2002,200 $4,500$4,600 Total$6,700$6,600 Inventory valuation$6,100,Individual Items,Loss recognition, $600,Lower of Cost or Market,Inventory Cost Market

9、,Category A: Item 1$1,000$ 700Item 21,2001,300 $2,200$2,000$2,000 Category B: Item 3$2,000$2,400 Item 42,5002,200 $4,500$4,6004,500 Total$6,700$6,600 Inventory valuation$6,500,Category,Loss recognition, $200,Lower of Cost or Market,Inventory Cost Market,Category A: Item 1$1,000$ 700Item 21,2001,300

10、$2,200$2,000 Category B: Item 3$2,000$2,400 Item 42,5002,200 $4,500$4,600 Total$6,700$6,600$6,600 Inventory valuation$6,600,Total,Loss recognition, $100,Lower of Cost or Market,Direct Inventory Reduction Method Record and report inventory holding loss each accounting period. Inventory Allowance Meth

11、od Record holding loss in a contra inventory account, Allowance to Reduce Inventory to LCM.,Reporting LCM,Recording the Reduction of Inventory to Cost,Cost Market December 31, 2006$20,000$20,000 December 31, 200725,00022,000 December 31, 200830,00028,000,Assume the company uses a perpetual system.,L

12、ower of Cost or Market,Direct Method-December 31, 2007,Cost of Good Sold3,000 Inventory3,000,Direct Method-December 31, 2008,Cost of Good Sold2,000 Inventory2,000,Lower of Cost or Market,Allowance MethodDecember 31, 2007,Loss due to Market Valuation 3,000 Allowance to Reduce Inventory to Market 3,00

13、0,Allowance to Reduce Inventory to Market 1,000 Loss due to Market Valuation 1,000,Allowance MethodDecember 31, 2008,Lower of Cost or Market,Because of the cost and time required to take a complete physical inventory, it is sometimes necessary to estimate the cost of ending inventory. Two popular me

14、thods are . . . Gross Margin Method Retail Method,Estimating Inventory,Assumes that the historical gross margin rate is reasonably constant in the short run. We must know the following: Net sales for the period. Cost of beginning inventory. Net purchases for the period. The historical gross margin r

15、ate.,Gross Margin Method,1. Estimate historical gross margin rate. 2. Add beginning inventory and net purchases to get cost of goods available for sale(COGAS). 3. Multiply sales by the gross margin rate to get estimated gross margin in dollars. 4. Subtract gross margin in dollars from net sales to g

16、et cost of goods sold(COGS). 5. Subtract COGS from COGAS to get the estimated cost of ending inventory.,Gross Margin MethodSteps to Follow,NoteCo, Inc. uses the gross margin method to estimate end of month inventory value. At the end of May the controller develops the following information: Gross ma

17、rgin 43% of sales; Inventory at May 1 $237,400; net purchases for May $728,300; net sales for May $1,213,000. Lets estimate Inventory at May 31.,Gross Margin MethodExample,Step 2,Gross Margin MethodExample,Step 2,Step 3,Gross Margin MethodExample,Step 2,Step 3,Step 4,Gross Margin MethodExample,Step

18、2,Step 3,Step 4,Step 5,Gross Margin MethodExample,Proof of Estimate,Gross Margin MethodExample,Divide gross profit by sales to calculate profit as a percentage of sales.,Expressing Gross Profit Percentages,If the gross margin percentage is expressed as a percentage of cost it must be converted to a

19、gross margin as a percentage of sales,Gross Profit as a % of Cost = Gross Profit as a Cost + Gross Profit as a % of Cost % of Sales,Expressing Gross Profit Percentages,A company should adjust the gross profit rate for known changes in the relationship between its gross profit and net sales. A compan

20、y may use a separate gross profit rate for each department or type of inventory that has a different markup percentage. A company may use an average gross profit rate based on several past periods to average out period-to-period fluctuations.,Enhancing the Accuracy of the Gross Profit Method,Another

21、 method of estimating inventory is the retail inventory method, which is widely used because it is allowed under GAAP and for income tax purposes.,This method was developed for retail operations like department stores. Uses both the retail value and cost of items for sales to calculate a cost-to- re

22、tail-ratio. Convert ending inventory at retail to ending inventory at cost.,Retail Method,To use this method we must know: Sales for the period. Beginning inventory at retail and cost. Net purchases at retail and cost. Adjustments to the original retail price: Additional markups and markdowns, Marku

23、p and markdown cancellations, Employee discounts.,Retail Method,1. Determine cost of goods sold and retail value of goods sold. 2. Calculate the cost-to-retail percentage. 3. Subtract retail value of goods available for sale from sales to get ending inventory at retail. 4. Multiply the cost-to-retai

24、l percentage times ending inventory at retail to get ending inventory at cost.,Retail MethodSteps to Follow,Webb Clothiers, Inc. uses the retail method to estimate inventory at the end of each month. For the month of May the controller gathers the following information: Beginning inventory at cost $

25、60,000, at retail $92,000, net purchases at cost $200,000, at retail $308,000; net sales for May $300,000. Lets estimate inventory at May 31.,Retail Method Example,Retail Method Example,Retail Method Example,Retail Method Example,Retail Method Example,Markup - original amount by which item is marked

26、 up above cost. Additional Markup - Increase in sales price above the original sales price. Additional Markup Cancellation - cancellation of some or all of an additional markup. Markdown - reduction in original sales price. Markdown Cancellation - increase in sales price after a markdown.,Retail Met

27、hodMarkups and Markdowns,Cost ($6),Retail Inventory Method Terminology,Cost ($6),Net markup =Total additional markups - total markup cancellations,Retail Inventory Method Terminology,Cost ($6),Retail Inventory Method Terminology,Cost ($6),Net markdown =Total additional markdowns - total markdown can

28、cellations,Retail Inventory Method Terminology,For methods using cost, such as average cost, FIFO and LIFO, the net markdowns are included in calculating the ratio.,Retail Inventory Method,Estimating Inventory on a FIFO Basis Exclude beginning inventory from the cost ratio.,Cost of net purchases FIF

29、O cost ratio = Retail value of (net purchases + net markups - net markdowns),Retail Method - FIFO Markups and Markdowns,Webb Clothiers, Inc. uses retail FIFO to estimate inventory at the end of each month. For the month of May the controller gathers the following information: Beginning inventory at

30、cost $60,000, at retail $92,000, net purchases at cost $200,000, at retail $308,000; net markups $8,000; net markdowns $4,000; and net sales for May $300,000. Lets estimate inventory at May 31.,Retail Method - FIFO Example,Retail Method - FIFO Example,Retail Method - FIFO Example,Retail Method - FIF

31、O Example,Retail Method - FIFO Example,Average Cost,The average cost method includes the beginning inventory in determining the cost-to-retail ratio.,Retail Inventory Method-Average Cost,Average Cost Basis,Retail Method -Average Cost Markups and Markdowns,Cost Retail,Beginning inventory$20$ 35 Purch

32、ases40 80 Net markups5 Net markdowns(10) Goods available for sale$60$110,Ending inventory, average cost (0.545 x $44) = $23.98,Retail Inventory Method-Average Cost,Lower-of-Cost-or-Market Basis,Exclude net markdowns from the ratio.,Retail Method Markups and Markdowns,Cost Retail,Beginning inventory$

33、20$ 35 Purchases40 80 Net markups 5 $60$120,Ending inventory at LCM (0.50 x $44) = $22,Retail Inventory Method-LCM,At Cost At Retail Goods available for sale: Beginning inventory $ 550 $ 900 Net purchases during period 6,290 8,900 Additional markups during period $ 225 Less: Additional markup cancel

34、lations (25) Net additional markups 200 Markdowns (600) Less: Markdown cancellations 100 Net markdowns (500) Total goods available for sale 6,840 9,500 Deduct: Sales (8,500) Ending inventory: At retail $ 1,000 At approximate FIFO cost with LCM ? At approximate average cost with LCM ?,Retail Method -

35、 Example,Steps to follow: Estimate ending inventory at FIFO cost. Convert to LIFO Cost Compute an internal conversion price index for the current period. Adjust current layer and each prior layer for change in price.,Cost of net purchases FIFO cost ratio = Retail value of (net purchases + net markup

36、s - net markdowns),Retail Method - LIFO Example,Lets build on our last example. Remember that Webb Clothier used Retail FIFO to estimate its inventory at the end of each month. Keep the given information the same but now assume that Webb uses DV LIFO to estimate its ending inventory. The only new in

37、formation is that the price index was 100 at the beginning of May (LIFO base) and 102 at the end of the month. We begin by estimating ending inventory using DV LIFO.,Retail Method - LIFO Example,This is our solution to the Webb Retail FIFO example,Retail Method - LIFO Example,Ending inventory is sti

38、ll shown at retail, but now it is stated at beginning of month prices.,Retail Method - LIFO Example,*BI cost ratio = ($60,000 $92,000) = 65.217%,Retail Method - LIFO Example,Valuing inventory at Current replacement cost Net realizable value Selling price Losses on purchase commitments Effect of inve

39、ntory errors,Other Inventory Issues,To lock in prices and assure sufficient quantities of materials, companies often contract with suppliers to purchase a specified quantity of materials in the future at an agreed upon unit cost.,Purchase Obligations,Formal, non-cancelable purchase contracts are not

40、 recognized in the accounts but should be disclosed. If it is expected that execution of the contract will result in a loss, then recognition of the loss is appropriate.,Purchase Obligations,A company entered into a noncancelable commitment to purchase inventory at a fixed price of $500,000 and the

41、market price at the end of the year is $450,000.,Purchasing Obligations and Product Arrangements,Year-end adjusting entry:,Loss on Purchase Commitments 50,000 Accrued Loss on Purchase Commitments 50,000,When the goods are purchased:,Inventory (or Purchases) 450,000 Accrued Loss on PurchaseCommitment

42、s 50,000 Accounts Payable 500,000,Purchasing Obligations and Product Arrangements,If we make an error in inventory, how will it impact the financial statements?,Inventory Errors,Overstatement of ending inventory Understates cost of goods sold and Overstates pretax income. Understatement of ending in

43、ventory Overstates cost of goods sold and Understates pretax income.,Inventory Errors,Overstatement of beginning inventory Overstates cost of goods sold and Understates pretax income. Understatement of beginning inventory Understates cost of goods sold and Overstates pretax income.,Inventory Errors,Overstatement of purchases Overstates cost of goods sold and Under