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BA 352 - Chapter 9
Notes, Homework and Book Review
34
Accounting
Post-Graduate
05/03/2021

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Cards

Term
GAAP Requirements for Lower of Cost or Net Realizable Value (LCNRV)
Definition
Inventories be carried at cost or net realizable value, whichever is lower
Term
LCNRV is a departure from historical cost and is a ______ accounting method
Definition
conservative
Term
Net Realizable Value=
Definition
estimated selling price - cost of completion and disposal (which can mean selling commissions)
Term
NRV example
Historical Cost $20
Selling Price $30
Cost to complete/dispose $4

Value item on Balance Sheet?
Definition
Lesser of: 20 or (30-4)= $20
Term
LCNRV can be applied 3 ways
Definition
1. apply LCM to each individual item in inventory
2. apply LCM to each class inventory i.e blue cheese, cheddar etc
3. apply LCNRV to entire inventory as a group
Term
Adjusting cost to market options: Recording loss as separate line item
Definition
In the income statement - directly or use allowance account
Term
Adjusting cost to market options: Recording loss as part of COGS
Definition
Adjust inventory directly or use allowance account
Term
All adjustments require:
Definition
Disclosure Note
Term
Benefits of estimating physical inventory
Definition
1. less costly
2. less time consuming
Term
Two popular methods of inventory estimation
Definition
1. Gross Profit
2. Retail Inventory
Term
Which method of inventory estimation is not allowed for financial statement
Definition
Gross Profit
Term
When to check inventory - Periodic
Definition
Often
Term
When to check inventory - perpetual
Definition
for audits and to check for shrinkage
Term
Gross Profit Method is useful when:
Definition
estimating inventory and COGS for interim reports

auditors are testing overall reasonableness of client inventory

determining the cost of inventory lost, stolen or destroyed

preparing budgets and forecasts
Term
Gross Profit Method assumes
Definition
historical gross margin rate is reasonable constant in the short run
Term
Things you need to know to calculate gross profit method
Definition
- net sales for period
- cost of beg. inventory
- net purchases for period
- historical gross margin rate
Term
Key to successfully applying gross profit method
Definition
Reliable Gross Margin %
Term
Calculation for COGS
Definition
COGS= Sales * (1- Gross Margin %)
Term
Retail Inventory Method was developed for
Definition
retail operations like department stores
Term
retail inventory method uses what to calculate a cost to retail ratio?
Definition
retail value and cost of items for sale
Term
retail inventory method objective
Definition
convert ending inventory at retail to ending inventory at cost
Term
What you need to know to calculate retail inventory method
Definition
- sales for period
- beg. inventory at retail and cost
- net purchases at retail and cost
- adjustment to original retail price
Term
Cost Ratio Calculation
Definition
Goods Available for Sale (COST)/ Goods Available for Sale (Retail)
Term
How to include Mark up and Mark down in retail inventory method
Definition
Mark Up - Increase (add to inventory and net purchases)
Mark Down - Decrease (Subtract from inventory and net purchases)
Term
Net purchases include
Definition
freight costs
Term
Cost to Retail % - Approximating Average Cost
Definition
= Beg. Inventory + Net Purchases / Retail value (Beg. inv+ net purchases+ net mark ups- net mark downs)
Term
Primary difference between gross profit method and retail inventory method
Definition
the retail inventory method includes Mark downs and mark ups in computation of cost to retail %
Term
Cost to Retail % - Approximating Average LCM
Definition
= Beg. Inventory + Net Purchases / Retail value (Beg. inv+ net purchases+ net mark ups)
Term
Things to remember in = Cost to Retail % calculation for Average LCM
Definition
Net markdowns are excluded in computation
Term
What does LIFO retail method assume
Definition
retail prices of goods remain stable during period
Term
What does LIFO retail method establish?
Definition
a LIFO base layer (beg. inv) and add or subtract layer from current period
Term
LIFO retail method - Cost to retail % includes
Definition
Beg. inv plus adjusted net purchases for period
Term
When there is an inventory error - overstatement
Definition
Understate COGS adn overstate pre-tax income
Term
When there is an inventory error - understatement
Definition
Overstate COGS and understates pre-tax income
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