Inventory Valuation Issues Sid Glandon DBA CPA Assistant
Inventory Valuation Issues Sid Glandon, DBA, CPA Assistant Professor of Accounting
Lower of Cost or Market Historical cost principle is violated n Conservative approach n – Recognize loss in period incurred not the period that the sale is made n Designated market is – Replacement cost • but not more than the Net realizable value (ceiling), • or less than the Net realizable value less normal profit (floor)
Lower of Cost or Market n Select the smaller of – Cost or designated market n If designated market, record the loss using the – Direct method • Charge to cost of goods sold – Indirect method • Charge to allowance to reduce inventory to market
Gross Profit Method of Estimating Inventory n Assumptions – Beginning inventory plus purchases equals goods available for sale – Goods not sold must be on hand – Goods available for sale less cost of goods sold (sales at cost) equals ending inventory
Retail Inventory Method n Used in retail n Assumes – High volume of sales – Different types of merchandise – Observable pattern between cost and prices n Determine ending inventory at retail n Convert to cost basis
Analysis of Inventory n Inventory turnover ratio – Number of times on average the inventory was sold during the period – Calculated as • Cost of goods sold ÷ Average inventory
- Slides: 10