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Present Value of an Ordinary Annuity of 1 341TABLE 6-4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1(n)8%9%10%11%12%15% Periods.92593 .91743 .90909 .90090 .89286 .8695711.78326 1.75911 1.73554 1.71252 1.69005 1.6257122.57710 2.53130 2.48685 2.44371 2.40183 2.2832333.31213 3.23972 3.16986 3.10245 3.03735 2.8549843.99271 3.8... |
Present Value of an Annuity Due of 1 343TABLE 6-5 PRESENT VALUE OF AN ANNUITY DUE OF 1(n)8%9%10%11%12%15% Periods1.00000 1.00000 1.00000 1.00000 1.00000 1.0000011.92593 1.91743 1.90909 1.90090 1.89286 1.8695722.78326 2.75911 2.73554 2.71252 2.69005 2.6257133.57710 3.53130 3.48685 3.44371 3.40183 3.2832344.31213 4.23972... |
$26.7b2011 releasesbefore taxesSources: The companies; WSJ researchLoan-Loss Reserve Releases at Big Banks
Source: Wall Street JournalEarnings:$1.2bAfter-TaxReserveRelease:$1.3bCitigroup:4Q 2011 Results
345As shown in the left side of the chart, the 10 largest banks had $127.2 billion in the allowance for loan losses a... |
1A variety of “short-term paper” is available for investment. For example, certificates of deposit (CDs) represent formal evidence of indebtedness, issued by a bank, subject to withdrawal under the specific terms of the instrument. Issued in various denominations, they have maturities anywhere from 7 days to 10 years a... |
Banks and other lending institutions often require customers to maintain minimum cash balances in checking or savings accounts. The SEC defines these minimum balances, called compensating balances, as “that portion of any demand deposit (or any time deposit or certificate of deposit) maintained by a corporation which c... |
ACCOUNTS RECEIVABLEReceivables are claims held against customers and others for money, goods, or services. For financial statement purposes, companies classify receivables as either current (short-term) or noncurrent (long-term). Companies expect to collect cur-rent receivables within a year or during the current opera... |
350 Chapter 7 Cash and ReceivablesCustomers often owe a company amounts for goods bought or services rendered. A company may subclassify these trade receivables, usually the most significant item it possesses, into accounts receivable and notes receivable. Accounts receivable are oral promises of the purchaser to pay f... |
against sales. If using the net method, a company considers Sales Discounts Forfeited as an “Other revenue” item.4Theoretically, the recognition of Sales Discounts Forfeited is correct. The receivable is stated closer to its realizable value, and the net sales figure measures the revenue recognized from the sale. As a ... |
354 Chapter 7 Cash and Receivablespercentage means that they are losing sales due to overly restrictive credit policies.) Thus, the FASB requires the allowance method for financial reporting purposes when bad debts are material in amount. This method has three essential features: 1. Companies estimate u n c o l l e c t... |
The percentage-of-sales basis results in a better matching of expenses with revenues—an income statement viewpoint. The percentage-of-receivables basis produces the better estimate of net realizable value—a balance sheet view-point. Under both bases, the company must determine its past experience with bad debt losses.P... |
358 Chapter 7 Cash and ReceivablesWhether using a composite rate or an aging schedule, the primary objective of the percentage of outstanding receivables method for financial statement purposes is to report receivables in the balance sheet at net realizable value. However, it is deficient in that it may not match the b... |
Notes Receivable 359NOTES RECEIVABLEA note receivable is supported by a formal promissory note, a written promise to pay a certain sum of money at a specific future date. Such a note is a negotiable instrument that a maker signs in favor of a designated payee who may legally and readily sell or otherwise transfer the n... |
Jeremiah records the transaction as follows.Notes Receivable 10,000.00 Discount on Notes Receivable ($10,000 2 $7,721.80) 2,278.20 Cash 7,721.80Discount on Notes Receivable is a valuation account. Companies report it on the balance sheet as a contra asset account to notes receivable. They then amortize the discount, ... |
Notes Receivable 363The carrying amount of the note is now $9,662 ($9,520 1 $142). Morgan repeats this process until the end of year 3.When the present value exceeds the face value, the note is exchanged at a premium. Companies record the premium on a note receivable as a debit and amortize it using the effective-inter... |
SPECIAL ISSUESThree additional special issues for accounting and reporting of receivables relate to the following. 1. Fair value option. 2. Disposition of receivables. 3. Presentation and disclosure.
ECONOMIC CONSEQUENCES AND WRITE-OFFSWhat do the numbers mean?The massive write-downs that fi nancial fi rms are posting ... |
8 LEARNING OBJECTIVEExplain accounting issues related to disposition of accounts and notes receivable.International PerspectiveIFRS also has the fair value option.
366 Chapter 7 Cash and Receivablescourse of events.” In order to accelerate the receipt of cash from receivables, the owner may transfer accounts or notes ... |
12Credit cards like MasterCard and Visa are a type of factoring arrangement. Typically, the purchaser of the receivable charges a ¾–1½ percent commission of the receivables purchased (the commission is 4–5 percent for credit card factoring).(4) Advances cash(6) Makes payment(2) Requests credit review
(1) Places order(... |
Special Issues 369recourse provision, servicing rights, and agreement to reacquire. In this approach, each party to the sale only recognizes the assets and liabilities that it controls after the sale.To illustrate, assume the same information as in Illustration 7-18 for Crest Textiles and for Commercial Factors, except... |
RETURN TO LENDERWhat do the numbers mean?It used to be that lenders of mortgages and other types of debt securities carried them on their books as a loan receiv-able. But thanks to Wall Street, many lenders learned how to package these loans together and sell (securitize) them, and record a gain on the sale. In fact, v... |
372 Chapter 7 Cash and ReceivablesPresentation and AnalysisPresentation of ReceivablesThe general rules in classifying receivables are: 1. Segregate the different types of receivables that a company possesses, if material. 2. Appropriately offset the valuation accounts against the proper receivable accounts. 3. Determi... |
Presentation of impaired receivables Disclose collateral arrangements Past Due but Not Impaired Neither PastAmounts Due or ,30 30–60 60–90 90–120 .120 ($000) Total Impaired days days days days days 2014 10,510 5,115 2,791 1,582 570 360 92 COLTON CORPORATIONBALANCE SHEET (PARTIAL)AS OF DECEMBER 31, 2014Curr... |
Summary of Learning Objectives 3751Identify items considered cash. To be reported as “cash,” an asset must be readily available for the payment of current obligations and free from contractual restrictions that limit its use in satisfying debts. Cash consists of coin, currency, and available funds on deposit at the ban... |
376 Chapter 7 Cash and ReceivablesA creditor often requires that the debtor designate or pledge receivables as security for the loan. (2) Sales (factoring) of receivables: Factors are finance companies or banks that buy receivables from businesses and then collect the remittances directly from the customers. In many ca... |
378 Chapter 7 Cash and ReceivablesShort account. If cash proves out over, it credits the overage to Cash Over and Short. The company closes Cash Over and Short only at the end of the year. It generally shows Cash Over and Short on the income statement as an “Other expense or revenue.”There are usually expense items in ... |
A bank reconciliation is a schedule explaining any differences between the bank’s and the company’s records of cash. If the difference results only from transactions not yet recorded by the bank, the company’s record of cash is considered correct. But, if some part of the difference arises from other items, either the ... |
KEY TERMSbank reconciliation, 379imprest system for petty cash, 377not-sufficient-funds (NSF) checks, 37910Explain common techniques employed to control cash. The common techniques employed to control cash are as follows. (1) Using bank accounts: A company can vary the number and location of banks and the types of acco... |
19Note that the impairment test shown in this appendix only applies to specific loans. However, if the loans are bundled into a security (e.g., the mortgage-backed securities), the impairment test is different. Impairments of securities are measured based on fair value. We discuss this accounting in Chapter 17.20The cr... |
Solution(a) 1. Cash 44,500 Loss on Sale of Receivables ($50,000 3 11%) 5,500 Accounts Receivable 50,000 2. Cash 68,250 Interest Expense ($75,000 3 9%) 6,750 Notes Payable 75,000KEY TERMimpairment, 38211Describe the accounting for a loan impairment. A creditor bases an impairment loan loss on the difference betw... |
Note: All asterisked Questions, Exercises, and Problems relate to material in the appendices to the chapter. 1. What may be included under the heading of “cash”? 2. In what accounts should the following items be classified?(a) Coins and currency.(b) U.S. Treasury (government) bonds.(c) Certificate of deposit.(d) Cash i... |
388 Chapter 7 Cash and Receivables(b) Instead of estimating uncollectibles at 2% of net sales, assume Wilton prepares an aging schedule that estimates total uncollectible accounts at $24,600. Prepare the entry to record bad debt expense.BE7-6 Milner Family Importers sold goods to Tung Decorators for $30,000 on November... |
E7-1 (Determining Cash Balance) The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2014, balance sheet. The following information is provided. 1. Commercial savings account of $600,000 and a commercial checking account balance of $900,000 are held at F... |
390 Chapter 7 Cash and ReceivablesInstructionsCompute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on account.E7-5 (Recording Sales Gross and Net) On June 3, Arnold Company sold to Chester Company merc... |
InstructionsAge the balance and specify any items that apparently require particular attention at year-end.E7-12 (Journalizing Various Receivable Transactions) Presented below is information related to James Garfield Corp.July 1 James Garfi eld Corp. sold to Warren Harding Co. merchandise having a sales price of $8,... |
accept a $200,000 zero-interest-bearing note due December 31, 2014, as payment in full. Hayduke is some-what of a credit risk and typically borrows funds at a rate of 10%. Abbey is much more creditworthy and has various lines of credit at 6%.Instructions(a) Prepare the journal entry to record the transaction of Decembe... |
County National Bank Disbursements Receipts BalanceBalance, August 1 $ 9,369Deposits during August $32,200 41,569Note collected for depositor, including $40 interest 1,040 42,609Checks cleared during August $34,500 8,109Bank service charges 20 8,089Balance, August 31 8,089 CashBalance, August 1 ... |
Instructions(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?(b) Show how accounts receivable would be presented on the balance sheet.(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?(CMA adapted)P7-4 (Bad-Debt Reporting) From inception of ope... |
Classifi cation by Balance in Estimated % Month of Sale Each Category UncollectibleNovember–December 2014 $1,080,000 2%July–October 650,000 10%January–June 420,000 25%Prior to 1/1/14 150,000 80% $2,300,000
% to Be Applied afterAge Net Debit Balance Correction Is MadeUnder 60 days $172,342 1%60–90 days 136,490 3%91... |
3. O n A p r i l 1 , 2 0 1 4 , B r a d d o c k s o l d a p a t e n t t o P e n n s y l v a n i a C o m p a n y i n e x c h a n g e f o r a $ 1 0 0 , 0 0 0 z e r o -interest-bearing note due on April 1, 2016. There was no established exchange price for the patent, and the note had no ready market. The p... |
400 Chapter 7 Cash and ReceivablesDeposits in transit are determined to be $3,000, and checks outstanding at May 31 total $850. Cash on hand (besides petty cash) at May 31, 2014, is $246.Instructions(a) Prepare the journal entries to record the transactions related to the petty cash fund for May.(b) Prepare a bank reco... |
See the book’s companion website, at www.wiley.com/college/kieso, for an additional set of problems.PROBLEMS SET B
CA7-1 (Bad-Debt Accounting) Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year... |
CA7-7 (Reporting of Notes Receivable, Interest, and Sale of Receivables) On July 1, 2014, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receiv-able from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the princip... |
404 Chapter 7 Cash and ReceivablesNaturally suspicious by nature, you decide to test the accuracy of the accounts receivable balance of $192,000 as shown in the ledger. The following information is available for your first year (precisely 9 months ended September 30, 2014) in business.(1) Collections from customers $18... |
Occidental Petroleum CorporationConsolidated Balance Sheets(in millions) Current PriorAssets at December 31, year yearCurrent assets Cash and cash equivalents $ 683 $ 146 Trade receivables, net of allowances 804 608 Receivables from joint ventures, partnerships, and other 330 321 Inventories 510 ... |
December December 31, 2013 31, 2014Cash $ 2,000 $ 1,685Accounts receivable 46,000 ?Allowance for doubtful accounts 550 ?Other current assets 8,500 7,925Current liabilities 37,000 44,600Total credit sales 205,000 255,000Collections on accounts receivable 190,000 228,000
408 Chapter 7 Cash and Receivables(a) Ide... |
410 Chapter 7 Cash and Receivablesimpaired. Hector also determines a composite rate of 2% is appropriate to measure impairment on all other receivables. The total impairment is computed as follows.
Hector therefore has an impairment related to its receivables of $78,200. The most con-troversial part of this computation... |
IFRS7-1 Briefly describe the impairment evaluation process and assessment of receivables on an individ-ual or collective basis.IFRS CONCEPTS AND APPLICATION
412 Chapter 7 Cash and ReceivablesIFRS7-2 What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ... |
• While many believe that LIFO provides a more useful income measure, other methods, such as FIFO and average-cost, better reflect the current value of inventory on the balance sheet.• Many companies discontinued LIFO use to support uniformity of inventory valuation across operations. That is, companies were using LIFO... |
ActualoverheadcostOverheadappliedOverhead MANUFACTURING COMPANYMERCHANDISING COMPANYCost ofgoodspurchasedCost ofgoodssoldInventory
Cost ofgoodsmanufacturedWork in ProcessCost of Goods SoldFinished Goods Cost ofgoodssoldILLUSTRATION 8-2Flow of Costs through Manufacturing and Merchandising CompaniesA manufacturing compan... |
shoplifting, incorrect recordkeeping, and the like. Inventory Over and Short therefore adjusts Cost of Goods Sold. In practice, companies sometimes report Inventory Over and Short in the “Other revenues and gains” or “Other expenses and losses” section of the income statement.Note that a company using the periodic inve... |
Basic Issues in Inventory ValuationGoods sold (or used) during an accounting period seldom correspond exactly to the goods bought (or produced) during that period. As a result, inventories either increase or decrease during the period. Companies must then allocate the cost of all the goods available for sale (or use) b... |
Goods in TransitSometimes purchased merchandise remains in transit—not yet received—at the end of a fiscal period. The accounting for these shipped goods depends on who owns them. For example, a company like Walgreens determines ownership by applying the “pas-sage of title” rule. If a supplier ships goods to Walgreens ... |
Physical Goods Included in Inventory 423this manner, Hill avoids personal property taxes in certain states. Other advantages of this transaction for Hill are the removal of the current liability from its balance sheet and the ability to manipulate income. For Chase, the purchase of the goods may solve a LIFO liquidatio... |
424 Chapter 8 Valuation of Inventories: A Cost-Basis ApproachEnding Inventory MisstatedWhat would happen if IBM correctly records its beginning inventory and purchases, but fails to include some items in ending inventory? In this situation, we would have the following effects on the financial statements at the end of t... |
426 Chapter 8 Valuation of Inventories: A Cost-Basis ApproachProduct CostsProduct costs are those costs that “attach” to the inventory. As a result, a company records product costs in the inventory account. These costs are directly connected with bringing the goods to the buyer’s place of business and converting such g... |
YOU MAY NEED A MAPWhat do the numbers mean?Does it really matter where a company reports certain costs in its income statement as long as it includes them all as expenses in computing income?For e-tailers, such as Amazon.com or Drugstore.com, where they report certain selling costs does appear to be im-portant. Contrar... |
Which Cost Flow Assumption to Adopt? 429ILLUSTRATION 8-12Specifi c Identifi cation Method Date No. of Units Unit Cost Total CostMarch 2 1,000 $4.00 $ 4,000March 15 3,000 4.40 13,200March 30 2,000 4.75 9,500Ending inventory 6,000 $26,700Cost of goods available for sale (computed in previous section) $43,900Deduct: E... |
Which Cost Flow Assumption to Adopt? 431If Call-Mart instead uses a perpetual inventory system in quantities and dollars, it attaches a cost figure to each withdrawal. Then the cost of the 4,000 units removed on March 19 consists of the cost of the items purchased on March 2 and March 15. Illustra-tion 8-16 shows the i... |
Special Issues Related to LIFO 433To illustrate, assume that Acme Boot Company uses the FIFO method for internal reporting purposes and LIFO for external reporting purposes. At January 1, 2014, the Allowance to Reduce Inventory to LIFO balance is $20,000. At December 31, 2014, the balance should be $50,000. As a result... |
Note the increased price of steel over the four-year period. In 2015, due to metal short-ages, Basler had to liquidate much of its inventory (a LIFO liquidation). At the end of 2015, only 6,000 pounds of steel remained in inventory. Because the company uses LIFO, Basler liquidates the most recent layer, 2014, first, fo... |
5A study by James M. Reeve and Keith G. Stanga disclosed that the vast majority of respondent companies applying LIFO use the dollar-value method or the dollar-value retail method to apply LIFO. Only a small minority of companies use the specific-goods (unit LIFO) approach or the specific-goods pooling approach. See J.... |
Note that if Bismark eliminates a layer or base (or portion thereof), it cannot rebuild it in future periods. That is, the layer is gone forever.At December 31, 2014, a comparison of the ending inventory at base-year prices ($270,000) with the beginning inventory at base-year prices ($250,000) indicates an increase in ... |
440 Chapter 8 Valuation of Inventories: A Cost-Basis ApproachUse of the double-extension method is time-consuming and difficult where sub-stantial technological change has occurred or where many items are involved. That is, as time passes, the company must determine a new base-year cost for new products, and must keep ... |
442 Chapter 8 Valuation of Inventories: A Cost-Basis ApproachThe tax law requires that if a company uses LIFO for tax purposes, it must also use LIFO for financial accounting purposes12 (although neither tax law nor GAAP requires a company to pool its inventories in the same manner for book and tax purposes). This requ... |
444 Chapter 8 Valuation of Inventories: A Cost-Basis ApproachTax consequences are another consideration. Switching from FIFO to LIFO usually results in an immediate tax benefit. However, switching from LIFO to FIFO can result in a substantial tax burden. For example, when Chrysler changed from LIFO to FIFO, it became r... |
Basis for Selection of Inventory Method 445that certain product lines can be highly susceptible to deflation instead of inflation. In addition, if the level of inventory is unstable, unwanted involuntary liquidations may result in certain product lines if using LIFO. Finally, for high inventory turnover in certain prod... |
Summary of Learning Objectives 447cost of goods sold at the end of the period by subtracting ending inventory from cost of goods available for sale. A company ascertains ending inventory by physical count.3Determine the goods included in inventory and the effects of inven-tory errors on the financial statements. Compan... |
910UnadjustedBalanceAdjustment (a) Adjustment (b) Adjustment (c) Adjusted BalanceBeginning inventoryEnding inventoryAverage inventoryCost of goods soldInventory turnoverExplana/g415onGoods officiallychange hands atthe point ofdes/g415na/g415on.Clinton shouldinclude the goodson consignmentto other sellers.Ending inventory... |
Be sure to check the book’s companion website for a Review and Analysis Exercise, with solution.Brief Exercises, Exercises, Problems, and many more learning and assessment toolsand resources are available for practice in WileyPLUS.
450 Chapter 8 Valuation of Inventories: A Cost-Basis Approach 1. In what ways are the in... |
Brief Exercises 451BE8-1 Included in the December 31 trial balance of Rivera Company are the following assets.Cash $ 190,000 Work in process $200,000Equipment (net) 1,100,000 Accounts receivable (net) 400,000Prepaid insurance 41,000 Patents 110,000Raw materials 335,000 Finished goods 170,000Prepare the current assets... |
Exercises 453 4. Merchandise received on January 6, 2015, costing $680 was entered in the purchase journal on January 7, 2015. The invoice showed shipment was made f.o.b. supplier’s warehouse on December 31, 2014. Because it was not on hand at December 31, it was not included in inventory. 5. Merchandise costing $720 w... |
454 Chapter 8 Valuation of Inventories: A Cost-Basis ApproachE8-6 (Determining Merchandise Amounts—Periodic) Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing. 2013 2014 2015Sales revenue $290,000 $ ? $410,000Sales returns and allowances ... |
456 Chapter 8 Valuation of Inventories: A Cost-Basis ApproachInstructions(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average-cost.(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO an... |
458 Chapter 8 Valuation of Inventories: A Cost-Basis ApproachInstructions(a) Compute the December 31, 2014, inventory using the FIFO method.(b) Compute the 2014 cost of goods sold using the LIFO method.(c) What method would you recommend to the owner to minimize income taxes in 2014, using the inventory information for... |
See the book’s companion website, at www.wiley.com/college/kieso, for an additional set of exercises.EXERCISES SET B
P8-1 (Various Inventory Issues) The following independent situations relate to inventory accounting. 1. Kim Co. purchased goods with a list price of $175,000, subject to trade discounts of 20% and 10%, w... |
Problems 461InstructionsUsing the format shown below, prepare a schedule of adjustments as of December 31, 2014, to the initial amounts per Dimitri’s accounting records. Show separately the effect, if any, of each of the eight transac-tions on the December 31, 2014, amounts. If the transactions would have no effect on ... |
Problems 463 Income for Years Ended 12/31/14 12/31/15Sales revenue $900,000 $1,350,000Less: Cost of goods sold 505,000 756,000 Other expenses 205,000 304,000 710,000 1,060,000Income before income taxes 190,000 290,000 Income taxes (40%) 76,000 116,000Net income $114,000 $ 174,000Other data: 1. Inventory ... |
Concepts for Analysis 465He has provided you with the following information about purchases made over a 6-year period. Ending Inventory Date (End-of-Year Prices) Price IndexDec. 31, 2010 $ 80,000 100Dec. 31, 2011 111,300 105Dec. 31, 2012 108,000 120Dec. 31, 2013 128,700 130Dec. 31, 2014 147,000 140Dec. 31, 2015 174,0... |
Concepts for Analysis 467Instructions(a) Explain to Ms. Yoakam what “inventory profits” are and how the LIFO method of inventory valua-tion could reduce them.(b) Explain to Ms. Yoakam the conditions that must exist for Estefan Co. to receive tax benefits from a switch to the LIFO method.CA8-7 (Average-Cost, FIFO, and L... |
T J InternationalSales $618,876,000Cost of goods sold 475,476,000Gross profit 143,400,000Selling and administrative expenses 102,112,000Income from operations 41,288,000Other expense 24,712,000Income before income tax 16,576,000Income taxes 7,728,000Net income $ 8,848,000
Using Your Judgment 469
Instructions(a) How mu... |
Using Your Judgment 471Accounting(a) Assuming Englehart uses a periodic inventory system, determine the cost of inventory on hand at March 31 and the cost of goods sold for March under first-in, first-out (FIFO).(b) Assume Englehart uses dollar-value LIFO and one pool, consisting of the combination of residential and c... |
Therefore, analysis is based on these numbers. However, there often are still questions about the reliability of the information reported in the financial statements. That is, subjective estimates are involved because of the possible impairment of the inventory. For example, Best Buy provides disclosures related to inv... |
ILLUSTRATION 9-1Lower-of-Cost-or-Market DisclosuresTarget(in millions) As of January 28, 2012Current AssetsInventory $7,918Notes to Consolidated Financial Statements (in part)11. InventorySubstantially all inventory and the related cost of sales are accounted for under the retail inventory accounting method (RIM) using... |
476 Chapter 9 Inventories: Additional Valuation Issueswhat the company can receive for the inventory and still earn a normal profit. Use of a floor deters understatement of inventory and overstatement of the loss in the current period.Illustration 9-3 graphically presents the guidelines for valuing inventory at the low... |
ILLUSTRATION 9-6Alternative Applications of Lower-of-Cost-or-Market Lower-of-Cost-or-Market by: Designated Individual Major Total Cost Market Items Categories InventoryFrozen Spinach $ 80,000 $104,000 $ 80,000 Carrots 100,000 90,000 90,000 Cut beans 50,000 40,000 40,000 Total frozen 230,000 234,0... |
GAAP does not specify a particular account to debit for the write-down. We believe the loss method presentation is preferable because it clearly discloses the loss resulting from a decline in inventory to market.Use of an AllowanceInstead of crediting the Inventory account for market adjustments, companies generally us... |
“PUT IT IN REVERSE”What do the numbers mean?The lower-of-cost-or-market rule is designed to provide timely information about the decline in the value of inven-tory. When the value of inventory declines, income takes a hit in the period of the write-down.What happens in the periods after the write-down? For some compani... |
4Manufacturing companies frequently employ a standardized cost system that predetermines the unit costs for material, labor, and manufacturing overhead and that values raw materials, work in process, and finished goods inventories at their standard costs. For financial reporting purposes, it is acceptable to price inve... |
LEARNING OBJECTIVE 3Explain when companies use the relative sales value method to value inventories.
ILLUSTRATION 9-11Allocation of Costs, Using Relative Sales Value Number Sales Total Relative Cost Cost of Price Sales Sales Total Allocated perLots Lots per Lot Price Price Cost to Lots Lot A 100 $10,000 $1,000,000... |
484 Chapter 9 Inventories: Additional Valuation Issuesshould recognize losses in the period during which such declines in market prices take place. [4]7As an example, at one time many Northwest forest-product companies such as Boise Cascade, Georgia-Pacific, and Weyerhaeuser signed long-term timber-cutting contracts wi... |
The Gross Profi t Method of Estimating Inventory 485Are purchasers at the mercy of market price declines? Not totally. Purchasers can protect themselves against the possibility of market price declines of goods under contract by hedging. In hedging, the purchaser in the purchase commitment simultane-ously enters into ... |
10An alternative method of estimating inventory using the gross profit percentage is considered by some to be less complicated than the traditional method. This alternative method uses the standard income statement format as follows. (Assume the same data as in the Cetus example above.)
Compute the unknowns as follows:... |
488 Chapter 9 Inventories: Additional Valuation IssuesEvaluation of Gross Profi t MethodWhat are the major disadvantages of the gross profit method? One disadvantage is that it provides an estimate. As a result, companies must take a physical inventory once a year to verify the inventory. Second, the gross profit method... |
Retail Inventory Method 489that the retailer keep a record of (1) the total cost and retail value of goods purchased, (2) the total cost and retail value of the goods available for sale, and (3) the sales for the period. Use of the retail inventory method is very common. For example, Safeway super-markets, Target, Wal-... |
include them in calculating the cost-to-retail ratio. Omitting the markdowns would make the cost-to-retail ratio lower, which leads to an approximate lower-of-cost-or-market.An example will make the distinction between the two methods clear. In-Fusion purchased two items for $5 apiece; the original sales price was $10 ... |
One characteristic of the retail inventory method is that it has an averaging effect on varying rates of gross profit. This can be problematic when companies apply the method to an entire business, where rates of gross profit vary among departments. There is no allowance for possible distortion of results because of su... |
496 Chapter 9 Inventories: Additional Valuation IssuesUsing financial ratios helps companies to chart a middle course between these two dangers. Common ratios used in the management and evaluation of inventory levels are inventory turnover and a related measure, average days to sell inventory.Inventory TurnoverThe inve... |
APPENDIX 9ALIFO RETAIL METHODSA number of retail establishments have changed from the more conventional treat-ment to a LIFO retail method. For example, the world’s largest retailer, Wal-Mart Stores, Inc., uses the LIFO retail method. The primary reason to do so is for the tax advantages associated with valuing invento... |
500 Chapter 9 Inventories: Additional Valuation IssuesFrom this information, we compute the inventory amount at cost:ILLUSTRATION 9A-6Ending Inventory at LIFO Cost, 2014—Fluctuating PricesEnding Inventoryat Base-YearRetail Prices—2014Layersat Base-Year Retail PricesPrice Index (percentage)Cost-to-Retail (percentage)End... |
Hakeman Clothing can then quickly approximate the ending inventory for 2014 under the LIFO retail method, as shown in Illustration 9A-11.ILLUSTRATION 9A-10Conventional Retail Inventory Method Cost RetailInventory January 1, 2014 $ 5,210 $ 15,000Net purchases 47,250 100,000Net additional markups . 7,000 ... |
FASB CODIFICATIONFASB Codification References[1] FASB ASC 330-10-35. [Predecessor literature: “Restatement and Revision of Accounting Research Bulletins,” Accounting Research Bulletin No. 43 (New York: AICPA, 1953), Ch. 4, par. 8.][2] FASB ASC 330-10-S99-3. [Predecessor literature: “AICPA Task Force on LIFO Inventory P... |
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