Inventories: Additional valuation issues

Inventories: Additional valuation issues

1. Presentation and analysis

   • °Presentation: Composition of inventory, inventory financing arrangements and inventoring costing methods employed
   • °Analysis: use of the financial ratios

2. Lower-of-cost-or-market

   • °Ceiling: upper limit is the net realizable value of inventory
   • °Floor: lower limit is the net realizable value less a normal profit margin
   • °designated market value: amount that a company compares to cost. Always the middle value
   • The application only losses in value that occur in the normal course of business from such causes as style changes, shift in demand, or regular shop wear
   • two methods: °cost-of-goods-sold method and loss method
   • °Use of allowance: Results in reporting the cost and market of inventory

3. Valuation bases

   • °Net realizable value: estimated selling price in the ordinary course of business.
   • °Relative sales value: also called "basket purchase", happens when a company buys a group of varying units in a single lump-sum purchase
   • °Purchase commitments: are the agreements to buy inventory weeks, months or years in advance

4. Gross profit method

   • Used to verify or determine the amount of the inventory or when a catastrophe destroys it or the records.
   • Assumptions: ° Beginning inv.+purchases= total goods. °goods not sold must be on hand. °the sales, reduced to cost, deducted from the +of opening inv. +purchases=ending inv.

5. Retail inventory method

   • °markup &markup cancellations
   • °Markdown & markdown cancellations
   • °conventional method: Ending inventory at retail xCost ratio = Value of ending inventory