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inventories: additional valuation issues

Apply the lower-of-cost-or-market rule.Recoding a Decline in Market Value (2 methods)Purchase commitmentsGross profit method of Estimating InventoryRetail inventory method With markups and markdownsValuation using relative sales value method. Learning Objectives. Lower-of-Cost-or-Market. INVENTORY: Benefit or utility derives from the ultimate sale of the goods. .

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inventories: additional valuation issues

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    1. Inventories: Additional Valuation Issues Chapter 9

    2. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information) 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

    5. Lower-of-Cost-or-Market

    6. Lower-of-Cost-or-Market

    7. 7

    8. 8

    11. Lower-of-Cost-or-Market

    14. Lower-of-Cost-or-Market

    16. Purchase Commitments Recent Study: "SEC Staff Report on Off-Balance Sheet Arrangements, special Purpose Entities, and Related Issues" Reports 30% of public companies have purchase commitments outstanding with an estimated value of $725 billion.

    17. Purchase Commitments Purchase commitments represent contracts for the purchase of inventory at a specified price in a future period. Date of inception: no asset or liability is recorded However, if material, the details of the contract should be disclosed in a note of the buyer's balance sheet . If a noncancelable contract, any losses should be recognized in the period during which the market decline takes place.

    18. Purchase Commitments In the early 1980s many Northwest forest product companies (Boise Cascade, Georgia-Pacific, Weyerhaeuser, and St. Regis Paper Co.) signed long-term timber-cutting contracts with the U.S. Forest Service. These contracts required that the companies pay $310 per thousand board feet for timber-cutting rights. The market price for timber-cutting rights in late 1984 dropped to $80 per thousand board feet. Therefore, these companies had long-term contracts that projected substantial future losses.

    19. Purchase Commitments Example St. Regis Paper Co. signed timber-cutting contract on 4/15/2004 to be executed in 2005 at a firm price of 10M. What is the journal entry on 4/15/2004?

    20. Purchase Commitments

    21. Purchase Commitments

    22. Gross Profit Method

    23. Gross Profit Method The gross profit method is used to estimate cost of ending inventory. This method is not appropriate for financial reporting purposes; however, it can serve a useful purpose when an approximation of ending inventory is needed. This method is used also when an estimate is needed due to a casualty loss.

    25. Gross Profit Method

    26. Gross Profit Method

    27. Gross Profit Method

    28. Gross Profit Method

    30. Retail Inventory Method It would be extremely difficult to determine the cost of each sale, to enter cost codes on the tickets, to change the codes to reflect decline in value of the merchandise, to allocate costs such as transportation, and so on.It would be extremely difficult to determine the cost of each sale, to enter cost codes on the tickets, to change the codes to reflect decline in value of the merchandise, to allocate costs such as transportation, and so on.

    32. 32

    33. 33 Markups, Markdowns and Cancellations We ignore markdowns and markdown cancellations when computing the cost to retail ratio using LCM. Why? This is designed to approximate the LCM Markup normally indicate that the market value of the item has increased. Markdown indicates that a decline in the utility of that item has occurred. If we attempt to approximate the LCM, markdowns are considered a current loss and are not involved in the calculation. Thus, the cost-to-retail is lower (when excluding markdowns).

    35. Retail Inventory - LCM Method

    36. Retail Inventory Method

    38. Valuation Basis: Relative Sales Value Relative sales values are an appropriate basis, when basket purchases are made. Basket purchases involve a group of varying units. The purchase price is paid as a lump sum amount. The lump sum price is allocated to units on the basis of their relative sales values.

    39. Valuation Basis: Relative Sales Value Kirby Company buys three different lots (A, B and C) in a basket purchase, paying $300,000 for all three. The lots were sold as follows: A ($75,000); B ($150,000) and C ($200,000) for a total of $425,000 What is the cost of A, B and C and the gross profit for each lot?

    40. Valuation Basis: Relative Sales Value

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