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Session 10 Inventories-III

Session 10 Inventories-III. Dollar Value LIFO-Attributes. Simplifies LIFO Minimizes LIFO liquidation risk Focuses on overall value. DVL-Methodology. Cost index Base year valuation Identification of layers Conversion of layers to current cost See p. 362. Gross Profit Method-Estimation.

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Session 10 Inventories-III

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  1. Session 10 Inventories-III Intermediate Accounting I - Fall 2011

  2. Dollar Value LIFO-Attributes • Simplifies LIFO • Minimizes LIFO liquidation risk • Focuses on overall value Intermediate Accounting I - Fall 2011

  3. DVL-Methodology • Cost index • Base year valuation • Identification of layers • Conversion of layers to current cost • See p. 362 Intermediate Accounting I - Fall 2011

  4. Gross Profit Method-Estimation • Destroyed inventory • Interim reporting • Test of reasonableness • Planning • Not allowed for GAAP Intermediate Accounting I - Fall 2011

  5. Gross Profit Method Application • Estimate COGS using GP% or MU% • Apply standard inventory algorithm Intermediate Accounting I - Fall 2011

  6. Retail Inventory Method • More accurate than GP • Need retail information • Convert back to cost @ current cost/retail % • See p. 435ff • Allowed for GAAP Intermediate Accounting I - Fall 2011

  7. Retail Terminology • Initial markup • Additional markup • Markup cancellation • Markdown • Markdown cancellation Intermediate Accounting I - Fall 2011

  8. Retail Method Application • Average cost-p. 438 • Net markdowns before % calc. • LCM (Conventional Retail Method)-p. 438 • Net markdowns after % calc. • LIFO retail-p. 439 • Same as avg. cost but layer % calc. Intermediate Accounting I - Fall 2011

  9. Shortages, Freight & Empl. Discounts • Include freight only on cost side • Purchase returns deduct in both. • Purchase discounts, if gross method, deduct on cost side • Abnormal shortages (both) before % calc. • Normal shortages (retail) after % calc. • Sales discounts are not considered. • Employee discounts are added to net sales. Intermediate Accounting I - Fall 2011

  10. DVL Retail • Follow LIFO retail until ending inventory at retail • Index end. inventory and value new layers • See p. 465 Intermediate Accounting I - Fall 2011

  11. Inventory Changes & Errors • Changes-other than change to LIFO • Retrospective treatment • Change to LIFO • No special treatment; F/N disclosure • Material Errors • Restatement (not P&L) and F/N disclosure Intermediate Accounting I - Fall 2011

  12. Typical F/N Disclosure • Description of item • Justification • Yearly impact Intermediate Accounting I - Fall 2011

  13. Competency Check • Theory points-4 • Acquisition • Carrying method • Cost flow assumption • Valuation-LCM Intermediate Accounting I - Fall 2011

  14. Competency Check Cont. • Cost flow assumptions-10 • Average cost • Specific identification • FIFO • LIFO • DVL • Gross profit • Retail • Conventional retail • LIFO retail • DVL retail Intermediate Accounting I - Fall 2011

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