西方財務(wù)會計原版ppt課件CHAPTER9INVENTORIES:ADDITIONALVALUATIONISSUESIntermediateAccounting13thEditionKieso,Weygandt,andWarfield

CHAPTER9INVENTORIES:Describeandapplythelower-of-cost-or-marketrule.Explainwhencompaniesvalueinventoriesatnetrealizablevalue.Explainwhencompaniesusetherelativesalesvaluemethodtovalueinventories.Discussaccountingissuesrelatedtopurchasecommitments.Determineendinginventorybyapplyingthegrossprofitmethod.Determineendinginventorybyapplyingtheretailinventorymethod.Explainhowtoreportandanalyzeinventory.LearningObjectivesDescribeandapplythelower-oNetrealizablevalueRelativesalesvaluePurchasecommitmentsLower-of-Cost-or-MarketValuationBasesGrossProfitMethodRetailInventoryMethodPresentationandAnalysisCeilingandfloorHowLCMworksApplicationofLCM“Market”EvaluationofruleGrossprofitpercentageEvaluationofmethodConceptsConventionalmethodSpecialitemsEvaluationofmethodPresentationAnalysisInventories:AdditionalValuationIssuesNetrealizablevalueLower-of-CMarket=ReplacementCostLowerofCostorReplacementCostLossshouldberecordedwhenlossoccurs,notintheperiodofsale.Acompanyabandonsthehistoricalcostprinciplewhenthefutureutility(revenue-producingability)oftheassetdropsbelowitsoriginalcost.Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.LCMMarket=ReplacementCostAcomDeclineintheRCusually=declineinsellingprice.RCallowsaconsistentrateofgrossprofit.IfreductioninRCfailstoindicatereductioninutility,thentwoadditionalvaluationlimitationsareused:Ceiling-netrealizablevalueandFloor

-netrealizablevaluelessanormalprofitmargin.WhyuseReplacementCost(RC)forMarket?Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.CeilingandFloorDeclineintheRCusually=deNot<CostMarketCeiling=NRVReplacementCostFloor=NRVlessNormalProfitMarginGAAPLCMWhatistherationaleforthe

Ceiling

and

Floor

limitations?Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>Illustration9-3NotCostMarketCeiling=NRVReplCeiling–preventsoverstatementofthevalueofobsolete,damaged,orshopworninventories.Floor–detersunderstatementofinventoryandoverstatementofthelossinthecurrentperiod.Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.RationaleforLimitationsCeiling–preventsoverstatemeLower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.HowLCMWorks(IndividualItems)Illustration9-5SolutiononnotespageLower-of-Cost-or-MarketLO1DLower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.MethodsofApplyingLCMIllustration9-6SolutiononnotespageLower-of-Cost-or-MarketLO1DLO1Describeandapplythelower-of-cost-or-marketrule.Lower-of-Cost-or-MarketRecordingLCM(datafromIllus.9-5and9-6)Endinginventory(cost) $415,000Endinginventory(LCM) 350,000AdjustmenttoLCM $65,000Allowanceoninventory 65,000Lossoninventory 65,000Inventory 65,000Costofgoodssold 65,000AllowanceMethodDirectMethodLO1DescribeandapplythelLO1Describeandapplythelower-of-cost-or-marketrule.Lower-of-Cost-or-MarketBalanceSheetPresentationLO1DescribeandapplythelLO1Describeandapplythelower-of-cost-or-marketrule.Lower-of-Cost-or-MarketIncomeStatementPresentationLO1DescribeandapplythelP9-1:

KCCompanymanufacturesdesks.Thecompanyattemptstoobtaina20%grossmarginonsellingprice.AtDecember31,2010,thefollowingfinisheddesksappearinthecompany’sinventory.Instructions:

Atwhatamountshouldthedesksappearinthecompany’sDecember31,2010,inventory,assumingthatthecompanyhasadoptedalower-of-FIFO-cost-or-marketapproachforvaluationofinventoriesonanindividual-itembasis?Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.P9-1:KCCompanymanufacturesNot<Cost=470Market=450Ceiling=450(500–50)ReplacementCost=460Floor=350(450-(500x20%))LCM=450Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>NotCost=470Market=450CeiliNot<Cost=450Market=430Ceiling=480(540–60)ReplacementCost=430Floor=372(480-(540x20%))LCM=430Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>NotCost=450Market=430CeiliNot<Cost=830Market=640Ceiling=820(900–80)ReplacementCost=610Floor=640(820-(900x20%))LCM=640Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>NotCost=830Market=640CeiliNot<Cost=960Market=1,000Ceiling=1,070(1,200–130)ReplacementCost=1,000Floor=830(1,070-(1,200x20%))LCM=960Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>NotCost=960Market=1,000CeiExpenserecordedwhenlossinutilityoccurs.Profitonsalerecognizedatthepointofsale.Inventoryvaluedatcostinoneyearandatmarketinthenextyear.Netincomeinyearoflossislower.Netincomeinsubsequentperiodmaybehigherthannormalifexpectedreductionsinsalespricedonotmaterialize.LCMusesa“normalprofit”indetermininginventoryvalues,whichisasubjectivemeasure.SomeDeficiencies:Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.EvaluationofLCMRuleExpenserecordedwhenlossinacontrolledmarketwithaquotedpriceapplicabletoallquantities,andnosignificantcostsofdisposal(raremetalsandagriculturalproducts)or(3) toodifficulttoobtaincostfigures(meatpacking)PermittedbyGAAPunderthefollowingconditions:ValuationBasesLO2Explainwhencompaniesvalueinventoriesatnetrealizablevalue.NetRealizableValueacontrolledmarketwithaquoUsedwhenbuyingvaryingunitsinasinglelump-sumpurchase.ValuationBasesLO3Explainwhencompaniesusetherelativesalesvaluemethodtovalueinventories.RelativeSalesValueE9-7:

LarsenRealtyCorporationpurchasedatractofunimprovedlandfor$55,000.Thislandwasimprovedandsubdividedintobuildinglotsatanadditionalcostof$30,000.Thesebuildinglotswereallofthesamesizebutowingtodifferencesinlocationwereofferedforsaleatdifferentpricesasfollows.Operatingexpensesallocatedtothisprojecttotal$18,200.Instructions:Calculatethenetincomerealizedonthisoperationtodate.UsedwhenbuyingvaryingunitsValuationBasesLO3Explainwhencompaniesusetherelativesalesvaluemethodtovalueinventories.E9-7(RelativeSalesValueMethod-Solution)x=x==xValuationBasesLO3ExplainwhGenerallysellerretainstitletothemerchandise.Buyerrecognizesnoassetorliability.Ifmaterial,thebuyershoulddisclosecontractdetailsinfootnote.Ifthecontractpriceisgreaterthanthemarketprice,andthebuyerexpectsthatlosseswilloccurwhenthepurchaseiseffected,thebuyershouldrecognizelossesintheperiodduringwhichsuchdeclinesinmarketpricestakeplace.ValuationBasesLO4Discussaccountingissuesrelatedtopurchasecommitments.PurchaseCommitmentsGenerallysellerretainstitleValuationBasesLO4Discussaccountingissuesrelatedtopurchasecommitments.Illustration:St.RegisPaperCo.signedtimber-cuttingcontractstobeexecutedin2012atapriceof$10,000,000.AssumefurtherthatthemarketpriceofthetimbercuttingrightsonDecember31,2011,droppedto$7,000,000.St.RegiswouldmakethefollowingentryonDecember31,2011.UnrealizedHoldingGainorLoss—Income 3,000,000 EstimatedLiabilityonPurchaseCommitments 3,000,000ValuationBasesLO4DiscussaValuationBasesLO4Discussaccountingissuesrelatedtopurchasecommitments.Illustration:WhenSt.Regiscutsthetimberatacostof$10million,itwouldmakethefollowingentry.Purchases(Inventory) 7,000,000EstimatedLiability 3,000,000 Cash 10,000,000IfCongresspermittedSt.Registoreduceitscontractpriceandthereforeitscommitmentby$1,000,000.EstimatedLiability 1,000,000 UnrealizedHoldingGainorLoss—Income 1,000,000ValuationBasesLO4DiscussaReliesonThreeAssumptions:GrossProfitMethodLO5Determineendinginventorybyapplyingthegrossprofitmethod.SubstituteMeasuretoApproximateInventoryBeginninginventorypluspurchasesequaltotalgoodstobeaccountedfor.Goodsnotsoldmustbeonhand.(3) Thesales,reducedtocost,deductedfromthesumoftheopeninginventorypluspurchases,equalendinginventory.ReliesonThreeAssumptions:GrGrossProfitMethodLO5Determineendinginventorybyapplyingthegrossprofitmethod.Illustration:CetusCorp.hasabeginninginventoryof$60,000andpurchasesof$200,000,bothatcost.Salesatsellingpriceamountto$280,000.Thegrossprofitonsellingpriceis30percent.Cetusappliesthegrossmarginmethodasfollows.Illustration9-13GrossProfitMethodLO5DeterGrossProfitMethodLO5Determineendinginventorybyapplyingthegrossprofitmethod.ComputationofGrossProfitPercentageIllustration9-16GrossProfitMethodLO5DeterE9-12:

AstaireCompanyusesthegrossprofitmethodtoestimateinventoryformonthlyreportingpurposes.PresentedbelowisinformationforthemonthofMay.Instructions:(a)

ComputetheestimatedinventoryatMay31,assumingthatthegrossprofitis25%ofsales.(b)

ComputetheestimatedinventoryatMay31,assumingthatthegrossprofitis25%ofcost.GrossProfitMethodLO5Determineendinginventorybyapplyingthegrossprofitmethod.E9-12:AstaireCompanyusesthE9-12(Solution):(a)

Computetheestimatedinventoryassuminggrossprofitis25%ofsales.GrossProfitMethodLO5Determineendinginventorybyapplyingthegrossprofitmethod.E9-12(Solution):(a)Computet(b)

Computetheestimatedinventoryassuminggrossprofitis25%ofcost.GrossProfitMethodLO5Determineendinginventorybyapplyingthegrossprofitmethod.25%100%+25%=20%ofsalesE9-12(Solution):(b)ComputetheestimatedinveDisadvantages:GrossProfitMethodLO5Determineendinginventorybyapplyingthegrossprofitmethod.Evaluation:Providesanestimateofendinginventory.Usespastpercentagesincalculation.Ablanketgrossprofitratemaynotberepresentative.Onlyacceptableforinterim(generallyquarterly)reportingpurposes.Disadvantages:GrossProfitMetRetailInventoryMethodLO6Determineendinginventorybyapplyingtheretailinventorymethod.Amethodusedbyretailers,tovalueinventorywithoutaphysicalcount,byconvertingretailpricestocost.thetotalcostandretailvalueofgoodspurchased,thetotalcostandretailvalueofthegoodsavailableforsale,andthesalesfortheperiod.Requiresretailerstokeep:RetailInventoryMethodLO6DP9-8:

FuqueInc.usestheretailinventorymethodtoestimateendinginventoryforitsmonthlyfinancialstatements.ThefollowingdatapertaintoasingledepartmentforthemonthofOctober2011.RetailInventoryMethodInstructions:

Prepareaschedulecomputingestimateretailinventoryusingthefollowingmethods:(1)Cost(2)LCM(3)LIFO(appendix)LO6Determineendinginventorybyapplyingtheretailinventorymethod.P9-8:FuqueInc.usestheretaRetailInventory-CostMethodLO6Determineendinginventorybyapplyingtheretailinventorymethod.=/RetailInventory-CostMethodRetailInventory-LCMMethodLO6Determineendinginventorybyapplyingtheretailinventorymethod.=/RetailInventory-LCMMethodLRetailInventory-LIFOMethodLO8DetermineendinginventorybyapplyingtheLIFOretailinventorymethods.=/=/Appendix9ARetailInventory-LIFOMethodSpecialItemsRetailInventoryMethodLO6Determineendinginventorybyapplyingtheretailinventorymethod.FreightcostsPurchasereturnsPurchasediscountsandallowancesTransfers-inNormalspoilageAbnormalshortagesEmployeediscountsSpecialItemsRetailInventoryWidelyusedforthefollowingreasons:Evaluation:topermitthecomputationofnetincomewithoutaphysicalcountofinventory,asacontrolmeasureindetermininginventoryshortages,inregulatingquantitiesofmerchandiseonhand,andforinsuranceinformation.RetailInventoryMethodLO6Determineendinginventorybyapplyingtheretailinventorymethod.Somecompaniesrefinetheretailmethodbycomputinginventoryseparatelybydepartmentsorclassofmerchandisewithsimilargrossprofits.WidelyusedforthefollowingAccountingstandardsrequiredisclosureof:PresentationandAnalysisLO7Explainhowtoreportandanalyzeinventory.Presentation:compositionoftheinventory,financingarrangements,andcostingmethodsemployed.Commonratiosusedinthemanagementandevaluationofinventorylevelsareinventoryturnoverandaveragedaystoselltheinventory.Analysis:AccountingstandardsrequiredMeasuresthenumberoftimesonaverageacompanysellstheinventoryduringtheperiod.PresentationandAnalysisLO7Explainhowtoreportandanalyzeinventory.InventoryTurnoverRatioIllustration9-26MeasuresthenumberoftimesoMeasurerepresentstheaveragenumberofdays’salesforwhichacompanyhasinventoryonhand.PresentationandAnalysisLO7Explainhowtoreportandanalyzeinventory.AverageDaystoSellInventory365days/7.5times=every48.7daysAverageDaystoSellIllustration9-26MeasurerepresentstheaverageU.S.GAAPpermitstheuseofLIFOforinventoryvaluation.iGAAPprohibitsitsuse.Inthelower-of-cost-or-markettestforinventoryvaluation,iGAAPdefinesmarketasnetrealizablevalue.U.S.GAAPdefinesmarketasreplacementcostsubjecttotheconstraints.InU.S.GAAP,inventorywrittendownunderthelower-of-cost-or-marketvaluationmaynotbewrittenbackuptoitsoriginalcostinasubsequentperiod.UnderiGAAP,thewrite-downmaybereversedinasubsequentperiod.U.S.GAAPpermitstheuseofLLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.PrimaryreasontouseLIFOTaxadvantages.Resultsinabettermatchingofcostsandrevenues.TheuseofLIFOretailismadeundertwoassumptions:stablepricesandfluctuatingprices.LO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.StablePrices—LIFORetailMethodAmajorassumptionoftheLIFOretailmethodisthatthemarkupsandmarkdownsapplyonlytothegoodspurchasedduringthecurrentperiodandnottothebeginninginventory.Beginninginventoryisexcludedfromthecost-to-retailpercentage.LO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.ILLUSTRATION9A-1LIFORetailMethod—StablePricesLO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.ILLUSTRATION9A-2EndingInventoryatLIFOCost,2010—StablePricesInventoryiscomposedoftwolayers.SolutiononnotespageLO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.ILLUSTRATION9A-3EndingInventoryatLIFOCost,2011—StablePricesAssumethattheendinginventoryfor2011atretailis$50,000.Noticethatthe2010layerisreducedfrom$11,000to$5,000.SolutiononnotespageLO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.FluctuatingPrices—Dollar-ValueLIFORetailIfthepriceleveldoeschange,thecompanymusteliminatethepricechangesoastomeasuretherealincreaseininventory,notthedollarincrease.LO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.Illustration:Assumethatthebeginninginventoryhadaretailmarketvalueof$10,000andtheendinginventoryhadaretailmarketvalueof$15,000.Assumefurtherthatthepricelevelhasrisenfrom100to125.Itisinappropriatetosuggestthatarealincreaseininventoryof$5,000hasoccurred.Instead,thecompanymustdeflatetheendinginventoryatretail.Illustration9A-4LO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.Illustration:Assumethatthecurrent2010priceindexis112(prioryear100)andthattheinventory($56,000)hasremainedunchanged.Illustration9A-5Dollar-ValueLIFORetailMethod—FluctuatingPricesLO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.Illustration:Fromthisinformation,wecomputetheinventoryamountatcost:Illustration9A-6Hernandezmustrestatelayersofaparticularyeartothepricesineffectintheyearwhenthelayerwasadded.LO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.Illustration9A-7ComparisonofEffectofPriceAssumptionsLO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.Illustration:Usingthedatafromthepreviousexample,assumethattheretailvalueofthe2011endinginventoryatcurrentpricesis$64,800,the2011priceindexis120percentofbase-year,andthecost-to-retailpercentageis75percent.ComputetheendinginventoryatLIFOcost.Illustration9A-8SubsequentAdjustmentsunderDollar-ValueLIFORetailLO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.Illustration:Converselyassumethatin2011theendinginventoryinbase-yearpricesis$48,000.ComputetheendinginventoryatLIFOcost.Illustration9A-9SubsequentAdjustmentsunderDollar-ValueLIFORetailLO8DetermineendinginventoLO8DetermineendinginventorybyapplyingtheLIFOretailmethods.ChangingfromConventionalRetailtoLIFOIllustration:ClarkClothingStoreemploystheconventionalretailmethodbutwishestochangetotheLIFOretailmethodbeginningin2010.Theamountsshownbythefirm’sbooksareasfollows.LO8DetermineendinginventoConventionalRetailInventoryMethodIllustration9A-10ConventionalRetailIllustratioIllustration9A-11ClarkClothingcanthenquicklyapproximatetheendinginventoryfor2010undertheLIFOretailmethod.Thedifferenceof$500($11,250-$10,750)betweentheLIFOretailmethodandtheconventionalretailmethodistheamountbywhichthecompanymustadjustbeginninginventoryfor2011.LO8DetermineendinginventorybyapplyingtheLIFOretailmethods.Illustration9A-11ClarkClothiCopyright?2009JohnWiley&Sons,Inc.Allrightsreserved.ReproductionortranslationofthisworkbeyondthatpermittedinSection117ofthe1976UnitedStatesCopyrightActwithouttheexpresswrittenpermissionofthecopyrightownerisunlawful.RequestforfurtherinformationshouldbeaddressedtothePermissionsDepartment,JohnWiley&Sons,Inc.Thepurchasermaymakeback-upcopiesforhis/herownuseonlyandnotfordistributionorresale.ThePublisherassumesnoresponsibilityforerrors,omissions,ordamages,causedbytheuseoftheseprogramsorfromtheuseoftheinformationcontainedherein.CopyrightCopyright?2009JohnWiley&西方財務(wù)會計原版ppt課件CHAPTER9INVENTORIES:ADDITIONALVALUATIONISSUESIntermediateAccounting13thEditionKieso,Weygandt,andWarfield

CHAPTER9INVENTORIES:Describeandapplythelower-of-cost-or-marketrule.Explainwhencompaniesvalueinventoriesatnetrealizablevalue.Explainwhencompaniesusetherelativesalesvaluemethodtovalueinventories.Discussaccountingissuesrelatedtopurchasecommitments.Determineendinginventorybyapplyingthegrossprofitmethod.Determineendinginventorybyapplyingtheretailinventorymethod.Explainhowtoreportandanalyzeinventory.LearningObjectivesDescribeandapplythelower-oNetrealizablevalueRelativesalesvaluePurchasecommitmentsLower-of-Cost-or-MarketValuationBasesGrossProfitMethodRetailInventoryMethodPresentationandAnalysisCeilingandfloorHowLCMworksApplicationofLCM“Market”EvaluationofruleGrossprofitpercentageEvaluationofmethodConceptsConventionalmethodSpecialitemsEvaluationofmethodPresentationAnalysisInventories:AdditionalValuationIssuesNetrealizablevalueLower-of-CMarket=ReplacementCostLowerofCostorReplacementCostLossshouldberecordedwhenlossoccurs,notintheperiodofsale.Acompanyabandonsthehistoricalcostprinciplewhenthefutureutility(revenue-producingability)oftheassetdropsbelowitsoriginalcost.Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.LCMMarket=ReplacementCostAcomDeclineintheRCusually=declineinsellingprice.RCallowsaconsistentrateofgrossprofit.IfreductioninRCfailstoindicatereductioninutility,thentwoadditionalvaluationlimitationsareused:Ceiling-netrealizablevalueandFloor

-netrealizablevaluelessanormalprofitmargin.WhyuseReplacementCost(RC)forMarket?Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.CeilingandFloorDeclineintheRCusually=deNot<CostMarketCeiling=NRVReplacementCostFloor=NRVlessNormalProfitMarginGAAPLCMWhatistherationaleforthe

Ceiling

and

Floor

limitations?Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>Illustration9-3NotCostMarketCeiling=NRVReplCeiling–preventsoverstatementofthevalueofobsolete,damaged,orshopworninventories.Floor–detersunderstatementofinventoryandoverstatementofthelossinthecurrentperiod.Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.RationaleforLimitationsCeiling–preventsoverstatemeLower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.HowLCMWorks(IndividualItems)Illustration9-5SolutiononnotespageLower-of-Cost-or-MarketLO1DLower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.MethodsofApplyingLCMIllustration9-6SolutiononnotespageLower-of-Cost-or-MarketLO1DLO1Describeandapplythelower-of-cost-or-marketrule.Lower-of-Cost-or-MarketRecordingLCM(datafromIllus.9-5and9-6)Endinginventory(cost) $415,000Endinginventory(LCM) 350,000AdjustmenttoLCM $65,000Allowanceoninventory 65,000Lossoninventory 65,000Inventory 65,000Costofgoodssold 65,000AllowanceMethodDirectMethodLO1DescribeandapplythelLO1Describeandapplythelower-of-cost-or-marketrule.Lower-of-Cost-or-MarketBalanceSheetPresentationLO1DescribeandapplythelLO1Describeandapplythelower-of-cost-or-marketrule.Lower-of-Cost-or-MarketIncomeStatementPresentationLO1DescribeandapplythelP9-1:

KCCompanymanufacturesdesks.Thecompanyattemptstoobtaina20%grossmarginonsellingprice.AtDecember31,2010,thefollowingfinisheddesksappearinthecompany’sinventory.Instructions:

Atwhatamountshouldthedesksappearinthecompany’sDecember31,2010,inventory,assumingthatthecompanyhasadoptedalower-of-FIFO-cost-or-marketapproachforvaluationofinventoriesonanindividual-itembasis?Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.P9-1:KCCompanymanufacturesNot<Cost=470Market=450Ceiling=450(500–50)ReplacementCost=460Floor=350(450-(500x20%))LCM=450Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>NotCost=470Market=450CeiliNot<Cost=450Market=430Ceiling=480(540–60)ReplacementCost=430Floor=372(480-(540x20%))LCM=430Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>NotCost=450Market=430CeiliNot<Cost=830Market=640Ceiling=820(900–80)ReplacementCost=610Floor=640(820-(900x20%))LCM=640Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>NotCost=830Market=640CeiliNot<Cost=960Market=1,000Ceiling=1,070(1,200–130)ReplacementCost=1,000Floor=830(1,070-(1,200x20%))LCM=960Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.Not>NotCost=960Market=1,000CeiExpenserecordedwhenlossinutilityoccurs.Profitonsalerecognizedatthepointofsale.Inventoryvaluedatcostinoneyearandatmarketinthenextyear.Netincomeinyearoflossislower.Netincomeinsubsequentperiodmaybehigherthannormalifexpectedreductionsinsalespricedonotmaterialize.LCMusesa“normalprofit”indetermininginventoryvalues,whichisasubjectivemeasure.SomeDeficiencies:Lower-of-Cost-or-MarketLO1Describeandapplythelower-of-cost-or-marketrule.EvaluationofLCMRuleExpenserecordedwhenlossinacontrolledmarketwithaquotedpriceapplicabletoallquantities,andnosignificantcostsofdisposal(raremetalsandagriculturalproducts)or(3) toodifficulttoobtaincostfigures(meatpacking)PermittedbyGAAPunderthefollowingconditions:ValuationBasesLO2Explainwhencompaniesvalueinventoriesatnetrealizablevalue.NetRealizableValueacontrolledmarketwithaquoUsedwhenbuyingvaryingunitsinasinglelump-sumpurchase.ValuationBasesLO3Explainwhencompaniesusetherelativesalesvaluemethodtovalueinventories.RelativeSalesValueE9-7:

LarsenRealtyCorporationpurchasedatractofunimprovedlandfor$55,000.Thislandwasimprovedandsubdividedintobuildinglotsatanadditionalcostof$30,000.Thesebuildinglotswereallofthesamesizebutowingtodifferencesinlocationwereofferedforsaleatdifferentpricesasfollows.Operatingexpensesallocatedtothisprojecttotal$18,200.Instructions:Calculatethenetincomerealizedonthisoperationtodate.UsedwhenbuyingvaryingunitsValuationBasesLO3Explainwhencompaniesusetherelativesalesvaluemethodtovalueinventories.E9-7(RelativeSalesValueMethod-Solution)x=x==xValuationBasesLO3ExplainwhGenerallysellerretainstitletothemerchandise.Buyerrecognizesnoassetorliability.Ifmaterial,thebuyershoulddisclosecontractdetailsinfootnote.Ifthecontractpriceisgreaterthanthemarketprice,andthebuyerexpectsthatlosseswilloccurwhenthepurchaseiseffected