Inventory Valuation Issues

1
Inventory Valuation Issues

• Sid Glandon, DBA, CPA
• Assistant Professor of Accounting

2
Lower of Cost or Market

• Historical cost principle is violated
• Conservative approach
• Recognize loss in period incurred not the period
  that the sale is made
• 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)

3
Lower of Cost or Market

• Select the smaller of
• Cost or designated market
• 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

4
(No Transcript)
5
Gross Profit Method of Estimating Inventory

• 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

6
(No Transcript)
7
(No Transcript)
8
Retail Inventory Method

• Used in retail
• Assumes
• High volume of sales
• Different types of merchandise
• Observable pattern between cost and prices
• Determine ending inventory at retail
• Convert to cost basis

9
(No Transcript)
10
Analysis of Inventory

• Inventory turnover ratio
• Number of times on average the inventory was sold
  during the period
• Calculated as
• Cost of goods sold Average inventory