far 1 ch 9

when is the gross profit inventory estimation technique valuable?

-In determining cost of inventory that has been lost, destroyed, or stolen -In estimating inventory and cost of goods sold for interim reports, avoiding the expense of a physical inventory count -In auditors' testing of the overall reasonableness of inventory amounts reported by clients -In budgeting and forecasting

average cost method

-cost to retail percentage is based on the weighted averages of the costs and retail amounts for all goods available for sale

when is the gross profit inventory estimation technique not acceptable

-for the preparation of annual financial statements

the LIFO retail method

-if inventory at retail increases during the year, a new layer is added -beginning of inventory is excluded from the calculation of the cost to retail percentage -assume that retail prices of goods remained stable during the period

what are the advantages of the lower of cost and net realizable value

-it avoids reporting inventory at an amount greater than the benefits it can provide -losses are recognized in the period the value of inventory declines below its cost

when the inventory error is discovered two years later

-no correcting journal entry is required because the error was self corrected -a disclosure note is needed

to correct an error in the same accounting period

-original erroneous entry should be reversed -appropriate entry should be recorded

normal inventory changes

-step 1: revising comparative statements: the company makes those statements appear as if the newly adopted inventory method had been applied all along. -step 2: affected accounts are adjusted -step 3: disclosure provides additional information

change in inventory method to LIFO method

-the LIFO method is used from the point the change is adopted and that periods beginning balance is considered as the base year inventory -a disclosure note is needed to explain a)the nature of and justification for the change, (b) the effect of the change on current year's income and earnings per share, and (c) why retrospective application was impracticable.

to correct an error in different accounting periods

-the previous year financial statement should be retrospectively restated -incorrect account balances are corrected by journal entry -correction of retained earnings is reported as a prior period adjustment to the beginning balance in the statement of shareholders equity -disclosure note describing the nature and impact of the error.

when the inventory error is discovered the following year

-the year before financial statements are restated to reflect the correct inventory amount, COGS, NI, and retained earnings when those statements are reported again. -you must make a journal entry to correct the error -prior period adjustments do not flow through the income statement but directly adjust retained earnings by going straight to the statement of shareholders equity.

what are the disadvantages of the lower of cost and net realizable value

-this method causes losses to be recognized that havent actually occurred

conventional retail method

-to approximate the lower of average cost and net realizable value, markdowns are not included in the calculation of the cost to retail percentage -the cost to retail % will always be lower which means EI will be lower

The two main factors that could cause the estimates of the inventory lost to be over- or understated are:(gross profit method)

1. The historical cost percentages used may not be representative of the current relationship between cost and selling price. 2. Theft or spoilage losses may not be appropriately considered in the cost percentage.

Inventory errors: over or understatement of ending inventory or purchases is caused by

1. mistake in physical count or pricing 2. cutoff errors

NRV is

Estimated selling price of the product reduced by reasonably predictable costs of completion, disposal, and transportation

the retail inventory method

Uses the cost-to-retail percentage based on a current relationship between cost and selling price to estimate ending inventory and COGS -Used by high-volume retailers selling many different items at low unit prices

applying the lower cost and net realizable value rule to groups of inventory items usually will cause

a higher inventory valuation than if applied on an item by item basis because group application permits decreases in the net realizable value of some items to be offset by increases in others.

markdown cancellation

elimination of a markdown

markup cancellation

elimination of an additional markup

additional markup

increase in selling price subsequent to initial markup

is the gross profit inventory estimation technique accepted by GAAP

nope

initial markup definition

original amount of markup from cost to selling price

markdown

reduction in selling price below the original selling price

gross profit inventory estimation technique

uses a cost of goods sold estimate and cost of goods available for sale to obtain an estimate of ending inventory

dollar value LIFO

when the EI exceeds the BI, a new LIFO layer is added or an increase in retail prices. Each layer year carries its unique retail price index and its unique cost-to-retail percentage