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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.
Sears values its inventory at the lower of cost or market. What does that mean? Under what circumstances might sears be justified in reporting its inventory at less than cost?
A departure from historical cost is warranted when the probable benefits to be received from any asset drop below the asset's cost. The benefits from inventory result from the ultimate sale of the goods. Deterioration, obsolescence, and changes in price levels are situations that might cause the benefits to be received from sale to drop below cost. The lower-of-cost-or-market approach recognizes losses in the period when the value of the inventory declines below its cost rather than in the period in which the goods ultimately are sold
How does Sears avoid counting all its inventory every time it produces financial statements? What are external price indices used for?
Sears uses the dollar-value LIFO retail inventory method. The retail inventory estimation technique avoids the counting of ending inventory by keeping track of goods available for sale not only at cost but also at retail price. Each Periods' sales, at sales prices, are deducted from the retail amount of goods available for sale to arrive at ending inventory at retail. This amount is then converted to cost of using a cost-to-retail percentage.
The dollar-value LIFO retail method uses a price index to first convert ending inventory at retail to base years prices. Yearly LIFO layers are then determined and each layer is converted to that year's current retail prices using the year's price index and then to cost using the layer's cost-to-retail percentage. For the price index, Sears uses an external index rather than an internally generated price index.