Inventory Valuation

Question 1

Retail Method

Answer 1

The retail method is a method of valuing inventory utilizing retail prices. Inventory at retail is converted to cost (using any of the cost flow assumptions, LIFO, FIFO, average cost) or to the lower of cost or market based on the cost-to-retail ratio. The method requires additional information in addition to units and unit costs: beginning inventory and purchases at retail and adjustments to original sales price, such as markups, markdowns, and cancellations of markups and markdowns

Question 2

Dollar value LIFO

Answer 2

Ending inventory must be restated back to base year prices.

Figure incremental layer by subtracting base year inventory from second year inventory at base year price. Then multiply incremental layer by price index to express in year 2 price

Question 3

Lower of cost or net realizable value

Answer 3

Inventory measured using FIFO or average cost method or specific identification uses lower of cost and NRV

Question 4

Lower of cost or market

Answer 4

Inventory measured using LIFO or retail method uses lower of cost or market method.

Market value is replacement cost (what you could repurchase inventory for), so long as that is less than NRV (what you can sell the inventory for) and above NRV minus normal profit margin.

Question 5

Retail inventory method - computing cost-to-retail ratio to find ending inventory at lower of average cost or market

Answer 5

1. Add beginning inventory and purchases
2. Add retail prices I’d beginning inventory, purchases, and net markups
3. Divide cost amounts by retail amounts to get ratio
4. From subtotal of beg inv, purchases, and net markups, subtract sales, normal losses, and markdowns, then multiply by ratio

Question 6

Goods in Transit from Seller

FOB Destination

Answer 6

Seller retains ownership until goods reach their destination

Question 7

Goods in Transit from Seller

FOB Shipping Point

Answer 7

Seller retains ownership until goods leave the shipping point; buyer owns once the goods depart the seller’s warehouse

Question 8

Cost in LCNRV

Answer 8

Purchase price
Shipping 
Handling 
Insurance 
Warehousing

Question 9

NRV in LCNRV

Answer 9

Make card

Question 10

Determine LCM

Answer 10

Determine cost
Determine market
    Replacement cost
    Ceiling (NRV)
    Floor
    Market is always middle number of 3 amounts listed above

Determine LCM

Question 11

Market in LCM

Answer 11

Market never higher than ceiling or lower than floor. Middle value of replacement, ceiling, floor

Ceiling = NRV
Selling price - disposal and selling costs

Floor = NRV - normal gross profit

Question 12

IFRS on inventory valuation

Answer 12

Only uses LCNRV since LIFO not accepted (LIFO used LCM).

Permits recovery of inventory write down