Inventories: Additional valuation issues.

Inventories: Additional valuation issues.

1. Gross profit method

   • Percentage
     • When there is needed only an estimate of the company's inventory. 1: B.I.+Purchases= total goods. 2: Goods not sold must be one hand. 3: (Sales-Cost)-Opening inventory+purchases=E.I.

2. Lower of Cost or market

   • Ceiling and floor
     • Upper limit is the net realizable value of inventory and the lower limit is the net realizable value less a normal profit margin.
   • Use of allowance
     • Results in reporting both the cost and the market of the inventory.
   • Application of LCM
     • Apply to each item, each category, or to the total of the inventory.
   • How LCM works
     • Incorporate only losses in value that occur in the normal of business from such causes as style changes, shift in demand, or regular shop wear.
   • Multiple periods
     • Recording increase or falling for the effects on inventory.
   • "Market"
     • Cost of goods sold method and loss method.

3. Valuation bases

   • Net Realizable value
     • Define "market" as net realizable value.
   • Relative sales value
     • When a company buys a group of varying units in a single lump-sum purchase.
   • Purchase commitments
     • Agreements to buy inventory with advance.

4. Retail inventory method

   • Concepts
     • Markup cancellations & Markdown cancellations.
   • Conventional method
     • E.I. at retail x cost of ratio = value of ending inventory.
   • Special items
     • Freight costs, purchase returns, purchase discounts and allowance.

5. Presentation and Analysis

   • Presentation
     • Composition of the inventory, inventory financing arrangements, and the inventory costing methos employed.
   • Analysis
     • By using financial ratios like inventory turnover=cost of goods solds/average inventory.