6.5 Presentation and Analysis of Inventory Flashcards
what is NRV
net realizable value: the future economic benefit a company will recieve when selling an item of inventory
selling price-cost
why do we care about NRV
because even tho companies want to sell goods at a higher price than their cost, we have to be realistic in ho wmuch money the good can be sold for
if NRV is lower than the cost
(Cost>nrv)
company must adjust the inventory account balance to the NRV
this is the lower of cost and nrv rule
what is the lcnrv rule
lower cost of nrv rule is that if nrv is lower than the cost of a good, we must adjust inventory to the nrv
when do companies apply the lcnrv rule?
at the end of each accounting period
if NRV is higher than cost?
do nothing!!!! because if u increase it then you are violating the concept of reporting at lcnrv!!
how to apply the lcnrv rule
1) determine the cost for each type of inventory (specific id, fifo, or avg cost)
2) determine nrv of each inventory type
3) compare nrv of each inventory type to its cost (determine if cost >nrv)
4) if cost > nrv, ADJUSTING ENTRY!!
(COGS DR, AND INVENTORY CR) (similar to the shrinkage je)
what balance of inventory do you report to the sofp?
sum of lcnrvs
what do ifrs and aspe require companies to disclose in fs/ notes to fs
the total (carrying) amount of inventory in the current assets section of the statement of financial position;
the cost of goods sold;
the cost formula(s) used (specific identification, FIFO, or average cost);
the amount of any writedown to net realizable value or reversals of previous writedowns, including the reason why the writedown was reversed;
andthe amount of any inventory pledged as security.
what is inventory turnover ratio
measure the number of times, on avg, that it sells inventory during the period
cogs for the period/average inventory
cogs for the period=
avg inventory= (begin inv + end inv )/2
days in inventory ratio
365 days/inventory turnover
this tells u inventory turnover daily!!! this measures the average age of the inventory or avg number of days it takes to sell inventory on hand
higher or lower value better for inventory turnover?
higher
extremely high is bad= shortages
higher or lower value better for idays in invetory?
lower!! sellig inventory quikly
extremely low is bad= shortage
how do you measure inventory turnover units?
times
how do you measure days in inventory units
days