Chapter 9 Flashcards
LOWER OF COST OR NET REALIZABLE VALUE: General rule
Historical cost used for inventory except when future ‘utility’ (expected benefit) < original cost
Net Realizable Value (NRV)
Selling price - predicted costs of completion, disposal, and transportation
When: Benefit < Cost
Write down value of the asset to the benefit received by the company
COGS Method
COGS xxx
Inventory xxx
Loss Method
DR: Loss due to dec of inventory to NRV
CR : Inventory
Allowance Method
DR: loss due to decline of inv to NRV
CR: allowance to reduce inv to NRV
Inventory can be written up to NRV if:
1) in a controlled market with a quoted price applicable to all quantities
2) when no significant costs of disposal are involved, AND
3) the product is available for immediate delivery
Purchase commitments
No journal entry or disclosure
Non-cancelable purchase commitments
Disclosed in FS notes.
Recognize expected losses immediately
JE: purchase commitments and refills
1) DR: unrealized holding loss- purchase commitments
CR: est. liability on purchase commitments
2) DR: purchases
DR: ELPC
CR: cash
Cost to Retail Ratio
Cost-GAS/Retail-GAS
Ending inventory at cost
Cost to Retail Ratio X ending inventory at retail
Inventory Cost Equation
Begin Inv + Purchases - COGS = Ending Inventory
Markup
Increase in price above original retail price
Markup cancellation
Decrease in markup
Markdown
Decrease in original sales price (below retail value)
Cost method
Considers all markups, markup cancellations, and markdowns
Conventional Retail Method
Omits markDOWNS
Values ending inventory more conservatively
LIFO retail method assumes:
1) markups and markdowns are incorporated
2) markups and markdowns apply to purchases
LIFO retail method Cost to Retail %
1) Beginning inventory
2) adjusted purchases
Dollar value lifo retail method
Ending inventory (retail) / inflation factor
—> table
Dollar value lifo method table
Ending inventory —> Year —> Layer @ Retail X Price (inflation) Index X Cost to Retail % = Ending Inventory @ LIFO Cost
