1. 1 Inventory Valuation Issues Sid Glandon, DBA, CPA Associate Professor of Accounting

2. 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 Lower of cost or market –The lesser of Cost, or Designated market

3. 3 Designated Market Replacement cost –But not more than the CEILING net realizable value –Selling price less cost of completion and disposal –Or less than the FLOOR net realizable value less normal profit margin

4. 4 Lower of Cost or Market If designated market is lower, record the loss using the –Direct method Charge to inventory –with the debit to cost of goods sold, or –if material, loss on reduction to LCM –Indirect method Charge an allowance account to reduce inventory to market

5. 5

6. 6

7. 7

8. 8 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

9. 9

10. 10

11. 11

12. 12 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

13. 13

14. 14 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

15. 15 Example: Inventory turnover ratio Cost of goods sold = $1,440,000 Beginning inventory = $150,000 Ending inventory = $170,000

16. 16 Example: Inventory turnover ratio