Ch 09: INVENTORIES, ADDITIONAL VALUATION ISSUES
Intermediate Accounting 01-KU
INTRODUSTION:
 Inventories are recorded at their cost.
 if inventory decline in value below its original cost, for any reason : Obsolescence, Price level
change, or damage.
 A Company should write down the inventory to net realizable value.
Net Realizable Value:
Is the net amount that a company expects to realize from the sale of inventory
Exercise:
Mander Corp. has unfinished inventory of tables with a cost of $950, a sale value of $1,000,
estimated cost of completion of $50, and estimated selling costs of $200.
What is the net realizable value of inventory?
Estimated Seles Value of inventory – Unfinished
Less : Estimated Cost of completion
Estimated cost to sell
(=) Net Realizable Value
$1,000
50
200
$750
How should Mander reports its inventories?


Inventory should be reported in the statement of financial position at :
Lower of Cost or Net Realizable Value ( LCNRV)
Inventory Items
Cost
NRV
Tables
$950
$750
Final
Inventory
Value
$750
Loss on inventory Write down should be reported in the income statement of $200 (950-750)
 A disclosure note must be made
Methods of Applying LCNRV
Regner Foods Company, has five items in its food products ending inventory , the company use the
LCNRV method and separates its food products into Two major groups, frozen and canned as follows :
Inventory Items
Frozen:
Spinach
Carrots
Cut beans
Total frozen
Canned
Peas
Mixed vegetables
Total canned
Total
Page 1 of 8
Cost
NRV
$ 80,000
100,000
50,000
230,000
$ 120,000
110,000
40,000
270,000
90,000
95,000
185,000
$415,000
72,000
92,000
164,000
$434,000
By: Ehab Abdou (97672930)
Ch 09: INVENTORIES, ADDITIONAL VALUATION ISSUES
Intermediate Accounting 01-KU
Instructions:
Determine the amount of Regner LCNRV evaluation using :
1. An item by item method (Individual Items)
2. Total group LCNRV evaluation. (Major Groups ).
3. Total on inventory (Total Inventory).
Solution:
Inventory Items
Frozen:
Spinach
Carrots
Cut beans
Total frozen
Canned
Peas
Mixed vegetables
Total canned
Total
Cost
NRV
Individual
Items
$ 80,000
100,000
50,000
230,000
$ 120,000
110,000
40,000
270,000
80,000
100,000
40,000
90,000
95,000
185,000
$415,000
72,000
92,000
164,000
$434,000
72,000
92,000
Major
Groups
Total
Inventory
230,000
384,000
164,000
394,000
415,000
$ 31,000
$ 21,000
Recording NRV Instead of Cost
One of two methods may be used to record the income effect of valuing inventory at net realizable
value
Assuming Individual Items method is used, the adjusting entry will be as follows:
Loss Method
Cost of goods Sold Method
Loss due to Inventory decline
31,000
Cost of Goods Sold
31,000
Inventory
31,000
Inventory
31,000
Assuming Major Groups method is used, the adjusting entry will be as follows:
Loss Method
Cost of goods Sold Method
Loss due to Inventory decline
21,000
Cost of Goods Sold
21,000
Inventory
21,000
Inventory
21,000
Note:
IFRS does not specify a particular account to debit for the write-down, but we believe the loss method
presentation is preferable because it clearly disclose the loss resulting from a decline in inventory net
realizable value.
Page 2 of 8
By: Ehab Abdou (97672930)
Ch 09: INVENTORIES, ADDITIONAL VALUATION ISSUES
Intermediate Accounting 01-KU
Exercise
Ricardo Company has the following date:
Sales Revenue
$ 200,000
Cost of goods sold (Before adjustment to net realizable value)
108,000
Ending Inventory (at Cost)
82,000
Ending Inventory ( at net realizable value)
70,000
Instructions:
1- Prepare the required adjusting entry to record the income effect of valuing inventory at net
realizable value using both of Loss method and cost of goods method.
2- Prepare a partial income statement to show the difference between the two methods.
Requirement 1:
Loss Method
Loss due to Inventory decline
Inventory
12,000
Cost of goods Sold Method
Cost of Goods Sold
12,000
12,000
Inventory
12,000
Requirement 2:
Loss Method
Sales revenue
(-) Cost of goods Sold
(=) Gross Profit
(-) Operating Expenses
Loss due to inventory Decline
(=) Income
200,000
108,000
Cost of goods Sold Method
Sales revenue
200,000
(-) Cost of goods Sold
120,000
92,000
(=) Gross Profit
(-) Operating Expenses
12,000
80,000
80,000
80,000
Use of an Allowance
Instead of crediting the Inventory account for net realizable value adjustments, companies generally
use an allowance account.
Loss Method
Loss due to Inventory decline
Allowance to reduce Inventory
Cost of goods Sold Method
12,000
12,000
Cost of Goods Sold
Allowance to reduce Inventory
12,000
12,000
Recovery of inventory loss
In periods following the write down, economic condition may change resulting increase in net realizable
value, in this situation the amount of write down is reversed, with the reversal limited to the amount of
the original write down.
Description
Allowance to reduce Inventory
Recovery of inventory Loss
Page 3 of 8
Dr.
Cr.
4,000
4,000
By: Ehab Abdou (97672930)
Ch 09: INVENTORIES, ADDITIONAL VALUATION ISSUES
Intermediate Accounting 01-KU
Estimating Ending Inventory:


Companies take a physical inventory to verify the accuracy of the perpetual inventory records.
If no records exist, companies approximate inventory using one of two methods:
Gross Profit method:
E9-14: Astaire Company uses the gross profit method to estimate inventory for monthly reporting
purposes. Presented below is information for the month of May.
Inventory, May 1
$ 160,000
Purchase (Gross)
640,000
Fright-in
30,000
Sales
1,000,000
Sales returns
70,000
Purchase discounts
12,000
Instructions:
(a) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of sales.
(b) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of cost.
Requirement 1:
Inventory, May 1
(+) Purchase (Gross)
(+) Fright-in
(-) Purchase Discount
(-) Purchase Returns
(=) Cost of goods available
(-) Cost of goods sold
Sales (at selling Price)
(-) Sales returns (at selling Price)
(-) Sales Discount (at selling Price)
(=) Net Sales (at selling Price)
(-) Gross Profit (930,000*25%)
(=) Approximate inventory (at Cost)
$ 160,000
640,000
30,000
-12,000
0
818,000
1,000,000
-70,000
0
930,000
-232,500
697,500
120,500
Requirement 2:
We have to convert gross profit on Cost into gross profit on sales
Gross Profit on sales =
Gross Profit on sales =
Page 4 of 8
By: Ehab Abdou (97672930)
Ch 09: INVENTORIES, ADDITIONAL VALUATION ISSUES
Inventory, May 1
(+) Purchase (Gross)
(+) Fright-in
(-) Purchase Discount
(-) Purchase Returns
(=) Cost of goods available
(-) Cost of goods sold
Sales (at selling Price)
(-) Sales returns (at selling Price)
(-) Sales Discount (at selling Price)
(=) Net Sales (at selling Price)
(-) Gross Profit (930,000*20%)
(=) Approximate inventory (at Cost)
Intermediate Accounting 01-KU
$ 160,000
640,000
30,000
-12,000
0
818,000
1,000,000
-70,000
0
930,000
-186,000
744,000
74,000
Note:
Gross Profit on sales =
Gross Profit on Cost =
Page 5 of 8
By: Ehab Abdou (97672930)
Ch 09: INVENTORIES, ADDITIONAL VALUATION ISSUES
Intermediate Accounting 01-KU
Retail method:
Exercise 1:
Dullards department store uses the retail method to estimate its monthly ending inventory, The
following information is available for one of its departments at August 31, 2011.
Cost
Net sales
Purchase
Purchase returns
Purchase Discount
Fright-in
Beginning Inventory
670,000
( 26,000 )
(15,360 )
6000
47,360
Retail
1,020,000
1,066,000
( 40,000 )
74,000
Instruction:
Determine the estimated cost of the ending inventory for each department on august 31,2011
,using the retail inventory method
Beginning Inventory
Purchase
Purchase returns
Purchase Discount
Fright-in
Cost of goods Available for sale
Cost To retail ( 682,000/1,100,000)=62%
- Net Sales
= Estimated Ending Inventory at retail
Cost
47,360
670,000
( 26,000 )
(15,360 )
6000
682,000
Retail
74,000
1,066,000
( 40,000 )
1,100,000
1,020,000
80,000
Cost Of goods Available At cost
682,000
Cost to retail Ratio = ----------------------------------------------- = ------------------ = 62%
Cost Of gods available At Retail
1,100,000
Ending inventory At Cost = Ending Inventory At retail × Cost To retail Ratio
80,000
×
62%
= 49,600
: ‫مالحظة‬
Net Sales ‫ إلى قيمة‬Employee discount ‫ وقيمة‬Normal Spoilage ‫تضاف قيمة‬
Page 6 of 8
By: Ehab Abdou (97672930)
Ch 09: INVENTORIES, ADDITIONAL VALUATION ISSUES
Intermediate Accounting 01-KU
P9-9:
Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly
financial statements. The following data pertain to a single department for the month of
October 2011.
Cost
52,000
272,000
16,600
5,600
Beginning Inventory – Oct, 1
Purchase
Fright in
Purchase Returns
Additional markups
Markup Cancellations
Markdown (net)
Normal Spoilage
Sales
Employee Discount
Retail
78,000
423,000
8,000
9,000
2,000
3,600
10,000
370,000
20,000
Instructions:
Prepare a schedule computing estimate retail inventory using the following methods:
(1) Conventional
(2) Cost
Solution:
Beginning Inventory – Oct, 1
Purchase
Fright in
Purchase Returns
Additional markups
Markup Cancellations
Abnormal Spoilage
Markdown (net)
Net Sales (Sales - Discount)
Normal Spoilage
Employee Discount
(=) Ending Inventory at Retail
Cost
Retail
52,000
272,000
16,600
-5,600
78,000
423,000
0
335,000
-8,000
9,000
-2,000
0
500,000
-3,600
-370,000
-10,000
-20,000
96,400
Ending Inventory at Cost (Using Conventional Retail Method)
Page 7 of 8
Cost to
Retail
67.00%
= 96,400 × 67.00% = $64,588
By: Ehab Abdou (97672930)
Ch 09: INVENTORIES, ADDITIONAL VALUATION ISSUES
Intermediate Accounting 01-KU
Solution:
Beginning Inventory – Oct, 1
Purchase
Fright in
Purchase Returns
Additional markups
Markup Cancellations
Abnormal Spoilage
Markdown (net)
Cost
Retail
52,000
272,000
16,600
-5,600
78,000
423,000
0
335,000
Net Sales (Sales - Discount)
Normal Spoilage
Employee Discount
(=) Ending Inventory at Retail
Ending Inventory at Cost (Using Cost Retail Method)
Page 8 of 8
-8,000
9,000
-2,000
0
-3,600
496,400
-370,000
-10,000
-20,000
96,400
Cost to
Retail
67.49%
= 96,400 × 67.49% = $65,056
By: Ehab Abdou (97672930)