intermediate financial account chapter 9

NRV= expected selling price minus estimated cost to complete and sell

NRV=

lifo retail inventory method

assume that the retail prices of goods remained stable during the period, we can compare beginning and ending inventory at retail to determine what happened to inventory quantity -if inventory at retail increases during the year, a new layer is added -if inventory at retail decreases, LIFO layers are liquidated

retrospectively, prior periods, revise, adjust, current amounts, new inventory method, disclosure note, face of the primary statements

changes in inventory method, other than a change to LIFO, are accounted for _______. this means reporting all previous periods' financial statements as if the new inventory method had been used in all ______ 1. first step is to _______ prior years' financial statements 2. then create a journal entry to ______ book balances from their _____ to what those balances would have been using the ________ 3. a _____ describes the change and justification for the change. also would indicate the _____ of the change on items not reported on the ______

average cost retail inventory method, before

cost-to-retail percentage is determined for all goods available for sale -net markups and net markdowns both are included in the retail column ________ the cost-to-retail percentage is determined

value of inventory declines below cost

just like with with LCNRV, the LCM approach to valuing inventory recognizes losses in the period when the ___________

individual items, inventory categories, or the entire inventory, higher inventory valuation, consistently

1. the LCNRV and LCM can be applied to _________ 2. applying the rule to groups of inventory items usually will cause a __________ than if applied item-by-item because group application permits decreases in the NRV of some items to be offset by increases in others 3. each approach is acceptable but should be applied ________ from 1 period to another

artificially manipulate income, disclosed, comparability between periods, big bath, overstating the write down, profits, assessment of a company's permanent earnings

A. A change in the accounting method a company uses to value inventory is one way managers can _______; however, this method of income manipulation is transparent. B. The effect on income of switching from one inventory method to another must be _______. This restores _______ & enhances earnings quality. C. On the other hand, inventory write-downs are included in the broader category of "_______" accounting techniques some companies use to manipulate earnings. By _______, _______ are increased in future periods as the inventory is used or sold. D. A financial analyst must carefully consider the effect of any significant asset write down on the _______

reversed, appropriate entry recorded, retrospectively restated, corrected, retained earnings, disclosure

A. If an inventory error is discovered in the same accounting period that it occurred, the original erroneous entry should simply be _______ and the _______ B. If a material inventory error is discovered in an accounting period subsequent to the period in which the error was made, any previous years' financial statements that were incorrect as a result of the error are _______ to reflect 1. Incorrect balances are _______ 2. A correction of _______ is reported as a prior period adjustment. 3. A _______ note describes the nature and impact of the error on income amounts

contract price, market price, a loss and corresponding liability are recorded for the difference, year end market price, market price

If the contract period is contained within a single fiscal year: 1. If market price is equal to or greater than the contract price, the purchase is recorded at the ________ 2. If market price is less than the contract price, the purchase is recorded at the ________ - If the contract period extends beyond the fiscal year: 1. If the market price at year-end is less than the contract price for outstanding purchase commitments, ________ 2. If market price on purchase date has not declined from year-end price, the purchase is recorded at the ________ 3. If market price on purchase date declines from year-end price, the purchase is recorded at the ________

lower of contract price (LCM)

Purchases made pursuant to a purchase commitment are recorded at the _________ or market price on the date the contract is executed.

cogs, disclosed

adjusting cost to NRV: 1. if inventory write-downs are commonplace for a company, losses usually are included in _________ 2. when a write-down is substantial and unusual, GAAP requires that the loss be expressly ________

cogs, separate item among operating expenses

adjusting cost to market: 1. if inventory write-downs are commonplace for a company, it usually will include the losses as part of _______ 2. a write-down loss that is substantial and unusual should be reported as a ____________

indirect method

allowance method does not change the cost amount -preferable because it clearly discloses _______ resulting from the market decline of inventory prices

various cost flow assumptions can be explicitly incorporated into the estimation technique

an advantage of the retail inventory method is that the _________________. we can even incorporate an approximation of the lower of cost and net realizable value

conventional retail method, utility of inventory

approximates average lower of cost and net realizable value by excluding markdowns from the calculation of the cost-to-retail percentage -the logic for this is that a markdown is evidence of a reduction in the __________

purchase commitments

contracts that obligate a company to purchase a specified amount of merchandise or raw materials at specified prices on or before specified dates

lifo, inadequate, disclosure

for changes to _____ method, accounting records usually are _____ for a company to calculate the income effect on prior years 1. this method is used from that point on 2. a _____ note explains nature of change and justification, effect of change on current year's income and EPS

other than LIFO , LCNRV

for companies using FIFO, average cost, or any method ___________ or the retail inventory method, inventories are reported at the ______________

lower of cost or market LCM

for companies using LIFO or the retail inventory method, inventories are reported at this

approximation of inventory, cogs= net sales- net sales for the period x historical gross profit percentage, subtracting estimated cogafs

gross profit method provides only an ___________ and is not acceptable for the presentation of annual financial statements -the technique estimates cogs= -an estimate of ending inventory is then obtain by ____________

for interim reporting purposes, assuming a periodic inventory system, budgeting (less costly and less time consuming), as an audit tool to test the reasonableness of ending inventory physical count, to estimate inventory losses due to theft, fire or other casualty

major uses of inventory estimation are...

ceiling

market should not be greater than the NRV

floor

market should not be less than NRV reduced by an allowance for an approximately normal profit margin

current replacement cost RC, NRV, NRV reduced by an allowance for an approximately normal profit margin

market value for LCM purposes is the inventory's ____________ except that: 1. market should not be greater than _______ 2. market should not be less than _____________

prevents overstating inventory (why would we want to spend more on inventory than necessary), prevents losses

rational for ceiling limitation.. -in current period -in next period

prevents understating inventory (we do not want to overstate potential losses), prevents abnormal profits

rational for floor limitations... -in current period -in next period

current replacement cost CRC

represents the cost to replace inventory -it is used if within a certain range called the "ceiling" and "floor"

direct method, amount of the loss, representational faithfulness, materiality

substitutes the (lower) market value figure for cost when valuing inventory -the company does not report a loss in the income statement because the cogs already includes the ________ -the income statement under this approach lacks ________, however it addresses ________ (does not affect net income)

floor

the NRV minus a normal profit margin (a subjective figure)

ceiling

the NRV of the inventory

RC, NRV, AND NRV-NVP

the designated market value is the number that falls in the middle of which three possibilities

net realizable value (NRV)

the estimated selling price of the product in the ordinary course of business reduced by reasonably predictable costs of completion, disposal, and transportation

cost-to-retail percentage

the reciprocal of the gross profit ratio

current cost-to-retail percentage

the retail inventory method tends to provide more accurate estimates than the gross profit method because it's based on the ___________ rather than a historical gross profit ratio

lower of cost or net realizable value (LCNRV)

this approach to valuing inventory recognizes losses in the period when the value of inventory declines below cost

retail inventory method, current selling price (retail), income tax purposes

this estimation technique is similar to the gross profit method in that it relies on the relationship between cost and selling price to estimate ending inventory and cogs, thus avoiding the necessity to take a physical count of inventory -requires a company to maintain records of inventory and purchases not only at cost but also at _________ -can be used for financial reporting and for __________

replacement cost, profit distortion

this is usually a good indicator of the direction of change in selling price -the upper and lower limited placed on this prevent certain types of _______

LCNRV

under IFRS, inventory also is valued at ________

gross profit method of inventory estimation techniques, estimates of inventory are desirable

useful in situations where ______________, such as: 1. determining the cost of inventory that has been lost, stolen, or destroyed 2. estimating inventory and cogs for interim reports, avoiding the expense of a physical inventory count 3. auditors' testing of the overall reasonableness of inventory amounts reported by clients 4. budgeting and forecasting

dollar-value LIFO retail method, price changes

using the LIFO retail method in combination with dollar-value LIFO (DVL) -improves on LIFO retail by first determining whether there has been a real increase in inventory quantity be eliminating any __________ before comparing beginning and ending inventory at retail

gross profit and retail inventory

what are the two methods of inventory estimation techniques