CH 09 Trim
CH 09 Trim
CHAPTER
INVENTORIES:
ADDITIONAL VALUATION ISSUES
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
9-2
Learning
Learning Objectives
Objectives
9-3
1.
2.
3.
4.
5.
6.
7.
Inventories:
Inventories: Additional
Additional Valuation
Valuation Issues
Issues
Lower-of-Costor-Net
Realizable
Value (LCNRV)
9-4
Net realizable
value
Illustration of
LCNRV
Application of
LCNRV
Recording net
realizable
value
Use of an
allowance
Recovery of
inventory loss
Evaluation of
rule
Valuation
Bases
Special
valuation
situations
Relative sales
value
Purchase
commitments
Gross Profit
Method
Gross profit
percentage
Evaluation of
method
Retail
Inventory
Method
Concepts
Conventional
method
Special items
Evaluation of
method
Presentation
and Analysis
Presentation
Analysis
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
LCNRV
A company abandons the historical cost principle
when the future utility (revenue-producing ability)
of the asset drops below its original cost.
9-5
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Net Realizable Value
Estimated selling price in the normal course of
business less estimated costs to complete and
estimated costs to make a sale.
Illustration 9-1
9-6
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Net Realizable Value
9-7
Illustration 9-2
LCNRV Disclosures
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Illustration of LCNRV: Regner Foods computes its
inventory at LCNRV.
Illustration 9-3
9-8
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Methods of Applying LCNRV
Illustration 9-4
9-9
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Methods of Applying LCNRV
In most situations, companies price inventory on an
item-by-item basis.
Tax rules in some countries require that companies use
an individual-item basis.
Individual-item approach gives the lowest valuation for
statement of financial position purposes.
Method should be applied consistently from one period
to another.
9-10
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Recording Net Realizable Value Instead of Cost
Cost of goods sold (before adj. to NRV)
Ending inventory (cost)
Ending inventory (at NRV)
Loss
Loss
Method
Method
COGS
COGS
Method
Method
9-11
$ 108,000
82,000
70,000
12,000
Inventory
12,000
Cost of goods sold
12,000
Inventory
12,000
LO 1 Describe
and apply the lower-of-cost-or-net realizable value rule.
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Statement of Financial Position Presentation
Partial Statement
9-12
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Income Statement Presentation
9-13
LO 1
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Use of an Allowance
Instead of crediting the Inventory account for net realizable
value adjustments, companies generally use an
allowance account.
Loss
Loss
Method
Method
12,000
Allowance to reduce
inventory to NRV
12,000
9-14
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Statement of Financial Position Presentation
Partial Statement
9-15
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Recovery of Inventory Loss
Amount of write-down is reversed.
Reversal limited to amount of original write-down.
Continuing the Ricardo example, assume the net realizable
value increases to $74,000 (an increase of $4,000). Ricardo
makes the following entry, using the loss method.
Allowance to reduce inventory to NRV
Recovery of inventory loss
9-16
4,000
4,000
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Recovery of Inventory Loss
Allowance account is adjusted in subsequent periods,
such that inventory is reported at the LCNRV.
Illustration 9-8
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
Evaluation of LCM Rule
Some Deficiencies:
9-18
Decreases in the value of the asset and the charge to expense are
recognized in the period in which the loss in utility occursnot in the
period of sale.
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
P9-1: Remmers Company manufactures desks. Most of the
companys desks are standard models and are sold on the basis of
catalog prices. At December 31, 2010, the following finished desks
appear in the companys inventory.
Lower-of-Cost-or-Net
Lower-of-Cost-or-Net Realizable
Realizable Value
Value
P9-1: Remmers Company manufactures desks. Most of the
companys desks are standard models and are sold on the basis of
catalog prices. At December 31, 2010, the following finished desks
appear in the companys inventory.
9-20
Valuation
Valuation Bases
Bases
Special Valuation Situations
Departure from LCNRV rule may be justified in situations when
cost is difficult to determine,
items are readily marketable at quoted market prices, and
units of product are interchangeable.
9-21
Copyright
Copyright
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9-22