Term
| GAAP Requirements for Lower of Cost or Net Realizable Value (LCNRV) |
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Definition
| Inventories be carried at cost or net realizable value, whichever is lower |
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Term
| LCNRV is a departure from historical cost and is a ______ accounting method |
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Definition
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Term
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Definition
| estimated selling price - cost of completion and disposal (which can mean selling commissions) |
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Term
NRV example
Historical Cost $20
Selling Price $30
Cost to complete/dispose $4
Value item on Balance Sheet? |
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Definition
| Lesser of: 20 or (30-4)= $20 |
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Term
| LCNRV can be applied 3 ways |
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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 |
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Term
| Adjusting cost to market options: Recording loss as separate line item |
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Definition
| In the income statement - directly or use allowance account |
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Term
| Adjusting cost to market options: Recording loss as part of COGS |
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Definition
| Adjust inventory directly or use allowance account |
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Term
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Definition
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Term
| Benefits of estimating physical inventory |
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Definition
1. less costly
2. less time consuming |
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Term
| Two popular methods of inventory estimation |
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Definition
1. Gross Profit
2. Retail Inventory |
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Term
| Which method of inventory estimation is not allowed for financial statement |
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Definition
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Term
| When to check inventory - Periodic |
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Definition
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Term
| When to check inventory - perpetual |
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Definition
| for audits and to check for shrinkage |
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Term
| Gross Profit Method is useful when: |
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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 |
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Term
| Gross Profit Method assumes |
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Definition
| historical gross margin rate is reasonable constant in the short run |
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Term
| Things you need to know to calculate gross profit method |
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Definition
- net sales for period
- cost of beg. inventory
- net purchases for period
- historical gross margin rate |
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Term
| Key to successfully applying gross profit method |
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Definition
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Term
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Definition
| COGS= Sales * (1- Gross Margin %) |
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Term
| Retail Inventory Method was developed for |
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Definition
| retail operations like department stores |
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Term
| retail inventory method uses what to calculate a cost to retail ratio? |
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Definition
| retail value and cost of items for sale |
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Term
| retail inventory method objective |
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Definition
| convert ending inventory at retail to ending inventory at cost |
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Term
| What you need to know to calculate retail inventory method |
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Definition
- sales for period
- beg. inventory at retail and cost
- net purchases at retail and cost
- adjustment to original retail price |
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Term
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Definition
| Goods Available for Sale (COST)/ Goods Available for Sale (Retail) |
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Term
| How to include Mark up and Mark down in retail inventory method |
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Definition
Mark Up - Increase (add to inventory and net purchases)
Mark Down - Decrease (Subtract from inventory and net purchases) |
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Term
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Definition
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Term
| Cost to Retail % - Approximating Average Cost |
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Definition
| = Beg. Inventory + Net Purchases / Retail value (Beg. inv+ net purchases+ net mark ups- net mark downs) |
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Term
| Primary difference between gross profit method and retail inventory method |
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Definition
| the retail inventory method includes Mark downs and mark ups in computation of cost to retail % |
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Term
| Cost to Retail % - Approximating Average LCM |
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Definition
| = Beg. Inventory + Net Purchases / Retail value (Beg. inv+ net purchases+ net mark ups) |
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Term
| Things to remember in = Cost to Retail % calculation for Average LCM |
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Definition
| Net markdowns are excluded in computation |
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Term
| What does LIFO retail method assume |
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Definition
| retail prices of goods remain stable during period |
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Term
| What does LIFO retail method establish? |
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Definition
| a LIFO base layer (beg. inv) and add or subtract layer from current period |
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Term
| LIFO retail method - Cost to retail % includes |
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Definition
| Beg. inv plus adjusted net purchases for period |
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Term
| When there is an inventory error - overstatement |
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Definition
| Understate COGS adn overstate pre-tax income |
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Term
| When there is an inventory error - understatement |
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Definition
| Overstate COGS and understates pre-tax income |
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