ACCT ch 9
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How do generally accepted accounting principles define market value for lower-of-cost-or-market purposes?
- GAAP define market value for LCM purposes as replacement cost (by purchases or reproduction) except that market should not:
- a. exceed the net realization value (i.e. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal)
- b. be less than net realizable value reduced by an allowance for an approximately normal profit margin
How does the gross profit method estimate cost of goods sold and ending inventory?
The gross profit method estimates cost of goods sold, which is then subtracted from cost of goods available for sale to obtain an estimate of ending inventory. The estimate of cost of goods sold is determined by first multiplying an historical gross profit ratio by net sales for the period to obtain estimated gross profit. This estimated gross profit is then subtracted from net sales to determine estimated cost of goods sold
In its simplest form, how does the retail inventory method estimate ending inventory and cost of goods sold?
In its simplest form, the retail investor method estimates the amount of ending inventory (at retail) by subtracting sales (at retail) from goods available for sale (at retail). this estimated ending inventory at retail is then converted to cost by multiplying it by the cost-to-retail percentage. This ratio is found by dividing goods available for sale at cost by goods available for sale at retail
How is the cost-to-retail percentage calculated using the average cost method?
To approximate average cost, the cost-to-retail percentage is calculated by dividing the total cost of goods available for sale by total goods available for sale at retail. Net markups and markdowns both are included in the determination of goods available for sale at retail
How is the cost-to-retail percentage calculated using the lower-of-cost-or-market method?
To approximate the lower-of-average-cost-or-market, often referred to as the conventional retail method, the cost-to-retail percentage is calculated by dividing the total cost of goods available for sale by the total goods available for sale at retail. Only markups are included in the calculation of the cost-to-retail percentage.
What is the three-step process used to convert ending inventory at retail prices to LIFO cost applying the dollar-value LIFO retail method?
- The three-step process used to convert ending inventory at year-end retail prices to LIFO cost applying the dollar-value LIFO retail method is:
- Step 1. Ending inventory at current year-end retail prices is converted to base year retail prices by dividing by the current year's retail price index (relative to the base year).
- Step 2. Ending inventory at base year retail is then apportioned into layers, each at base year retail.
- Step 3. Each layer is then converted to layer year cost using the layer year's unique price index and cost-to-retail percentage
How is a change in inventory method other than a change to LIFO treated?
Changes in inventory methods, other a change to the LIFO method, are reported retrospectively. This means reporting all previous period's financial statements as if the new inventory method had been used in all prior periods
How is a change in inventory method to LIFO treated?
Accounting records usually are inadequate for a company changing to LIFO to report the effect on prior years' income. Instead, the LIFO method simply is used from that point on. The base year inventory for all future LIFO determinations is the beginning inventory in the year the LIFO method is adopted.
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