Problem Solving Survival Guide to accompany Intermediate Accounting, Volume 1: Chapters 1 - 14, 15th Edition

CHAPTER 9

INVENTORIES: ADDITIONAL VALUATION ISSUES

OVERVIEW

Sometimes a business is faced with the situation where impairments in the value of its inventory are so great relative to selling prices that items cannot be sold at a normal profit. In compliance with a conservative approach, any impairments in value should be recognized in the current period and the inventory should be reported at the lower-of-cost-or-market (LCM) on the balance sheet. By following the LCM rule, the impairment is recognized in the period in which it occurs, rather than in the later period of disposal of the inventory. Accounting for declines in inventory value is discussed in this chapter.

Sometimes a business may need to estimate the cost of inventory on hand at a certain date. Two estimation techniques—the gross profit and the retail method of inventory estimation—are discussed in this chapter. Although the conventional retail method yields results which are to approximate a lower-of-average-cost-or-market valuation for the inventory, the retail method also can be used to approximate FIFO cost, lower of FIFO cost or market, weighted-average cost, LIFO cost, etc. The conventional retail method and the LIFO retail method are discussed in this chapter.

SUMMARY OF LEARNING OBJECTIVES

1. Describe and apply the lower of cost or market rule. If inventory declines in value below its original cost for whatever reason, a company should write down the inventory to reflect this loss. The general rule is to abandon ...