Term
| ch.9- When does a company depart from the historical cost priniciple? |
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Definition
A company abandons the historical cost principle when the future utility ( revenue producing ability ) of the asset drops below its original cost.
Therefore companies report inventories at the lower of cost or market at each reporting period |
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Term
| ch.9 - The term market in the phrase " the lower of cost or market" LCM generally means.... |
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Definition
| The cost to replace the item by purchase or reproduction. |
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Term
| ch.9 - Because the term market means different things for different businesses, what rule is applied? |
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Definition
| the rule means that companies value goods at cost or cost to replace, whichever is lower. |
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Term
| ch.9 - Lower of cost or market method is what kind of approach? |
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Definition
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Term
| A company should charge a loss of utility against.... |
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Definition
| revenues in the period in which the loss occurs, not in the period of the sale. |
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Term
| Why use replacement cost to represent market value? |
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Definition
| Because a decline in the replacement cost of an item usually reflects or predicts a decline in selling price. |
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Term
| Because the reduction in the replacement cost of an item fails to indicate a corresponding reduction in utility what two additional valuation limitations are used? |
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Definition
| Net realizable value ( NRV ) and net realizable value less a normal profit margin. |
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Term
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Definition
| Sales value less estimated cost of completion and disposal. |
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Term
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Definition
| NRV - Allowance for normal profit margin. |
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Term
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Definition
1.) Decline in the RC usually= decline is selling price
2.) RC allows a consistent rate of gross profit.
3.) If reduction in RC fails to indicate reduction in utility,then two additional valuation limitations are used:
Ceiling: NRV
floor : NRV Less a normal profit margin. |
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Term
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Definition
| prevents overstatement of the value of the obsolete, damaged, or shopworn inventories. |
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Term
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Definition
| Deters understatement of inventory and overstatement of the loss in the current period. |
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Term
| What are some deficiencies of the LCM rule: |
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Definition
1.) Expense recorded when loss in utility occurs. Profit on sale recognized at the point of sale.
2.) Inventory valued at cost in one year and at market in the next year.
3.) Net income in year of loss is lower. Net income in subsequent period may be higher than normal if expected reductions in sales price do not materialize.
4.) LCM uses a normal profit in determination inventory values, which is a subjective measure. |
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Term
| Net realizable value is permitted under GAAP under the following conditions: |
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Definition
1) A controlled market with a quoted price applicable to all quantities and;
2) no significant costs of disposal ( rare metals and agricultural products) or
3) too difficult to obtain cost figures ( meatpacking ) |
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Term
| Valuation basis: purchase commitments |
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Definition
- generally seller retains title to the merchandise.
- buyer recognizes no asset or liability
- if material, the buyer should disclose contract details in footnote.
- If the contract price is greater than the market price, and the buyer expects that losses will occur when the purchase is affected, the buyer should recognize losses in the period during which such declines in market prices take place. |
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Term
| under the gross profit method, the substitute measure to approximate inventory relies on which three assumptions: |
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Definition
1.) beginning inventory plus purchases equals total goods to be accounted for.
2) Goods not sold must be on hand
3)The sales, reduced to cost, deducted from the sum of the opening inventory plus purchases, equals ending inventory. |
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Term
| What are some disadvantages of the gross profit method? |
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Definition
Disadvantages:
1.) provides an estimate of ending inventory
2.) uses past percentages in calculation.
3.) A blanket gross profit rate may not be representative.
4.) Only acceptable for interim ( generally quarterly ) reporting purposes. |
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Term
| What is the inventory turnover ratio? |
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Definition
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Term
| What are primary reasons to use LIFO |
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Definition
- tax advantages
- results in a better matching of costs and revenues
- the use of LIFO retail under two assumptions.
1.) Stable prices and
2.)fluctuating prices. |
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