Spiceland C9 Solutions.docx

Spiceland C9 Solutions.docx

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SpicelandC9Solutions

Chapter9Inventories:

AdditionalIssues

QuestionsforReviewofKeyTopics

Question9-1

GAAPgenerallyrequiretheuseofhistoricalcosttovalueassets,butadeparturefromcostisnecessarywhentheutilityofanassetisnolongerasgreatasitscost.Theutilityorbenefitsfrominventoryresultfromtheultimatesaleofthegoods.Thisutilitycouldbereducedbelowcostduetodeterioration,obsolescence,orchangesinpricelevels.Toavoidreportinginventoryatanamountgreaterthanthebenefitsitcanprovide,thelower-of-cost-or-marketapproachtovaluinginventorywasdeveloped.Thisapproachresultsintherecognitionoflosseswhenthevalueofinventorydeclinesbelowitscost,ratherthanintheperiodinwhichthegoodsareultimatelysold.

Question9-2

ThedesignatedmarketvalueintheLCMruleisthemiddlenumberofreplacementcost（RC）,netrealizablevalue（NRV）andnetrealizablevaluelessanormalprofitmargin（NRV-NP）.ThisistheamountcomparedwithcosttodetermineLCM.

Question9-3

TheLCMdeterminationcanbemadebasedonindividualinventoryitems,onlogicalcategoriesofinventory,orontheentireinventory.

Question9-4

Thepreferredmethodistorecordthelossfromthewrite-downofinventoryasaseparateitemintheincomestatementratherthanincludingthewrite-downincostofgoodssold.Alessdesirablealternativeistoincludethelossincostofgoodssold.

Question9-5

Thegrossprofitmethodestimatescostofgoodssold,whichisthensubtractedfromcostofgoodsavailableforsaletoobtainanestimateofendinginventory.Theestimateofcostofgoodssoldisfoundbymultiplyingsalesbythehistoricalratioofcosttosellingprices.Thecostpercentageisthereciprocalofthegrossprofitratio.

Question9-6

Thekeytoobtainingaccurateestimateswhenusingthegrossprofitmethodisthereliabilityofthecostpercentage.Ifthecostpercentageistoolow,costofgoodssoldwillbeunderstatedandendinginventoryoverstated.Costpercentagesusuallyarebasedonrelationshipsofpastyears,whicharen’tnecessarilyrepresentativeofthecurrentrelationship.Failuretoconsidertheftorspoilagealsocouldcauseanoverstatementofendinginventory.

AnswerstoQuestions（continued）

Question9-7

Theretailinventorymethodfirstdeterminestheamountofendinginventoryatretailbysubtractingsalesfortheperiodfromgoodsavailableforsaleatretail.Endinginventoryatretailisthenconvertedtocostbymultiplyingitbythecost-to-retailpercentage.

Question9-8

Themaindifferencebetweenthegrossprofitmethodandtheretailinventorymethodisinthedeterminationofthecostpercentageusedtoconvertsalesatsellingpricestosalesatcost.Theretailinventorymethodusesacostpercentage,calledthecost-to-retailpercentage,whichisbasedonacurrentrelationshipbetweencostandsellingprice.Thegrossprofitmethodreliesonpastdatatoreflectthecurrentcostpercentage.

Question9-9

Initialmarkup—Originalamountofmarkupfromcosttosellingprice.

Additionalmarkup—Increaseinsellingpricesubsequenttoinitialmarkup.

Markupcancellation—Eliminationofanadditionalmarkup.

Markdown—Reductioninsellingpricebelowtheoriginalsellingprice.

Markdowncancellation—Eliminationofamarkdown.

Question9-10

Whenusingtheretailmethodtoestimateaveragecost,thecost-to-retailpercentageisdeterminedbydividingtotalcostofgoodsavailableforsalebytotalgoodsavailableforsaleatretail.Byincludingbeginninginventoryinthecalculationofthecost-to-retailpercentage,thepercentagereflectstheaveragecost/retailrelationshipforallinventories,notjusttheportionacquiredinthecurrentperiod.

Question9-11

Thelower-of-cost-or-market（LCM）retailvariationcombinedwiththeaveragecostmethodiscalledtheconventionalretailmethod.TheLCMruleisincorporatedintotheretailinventoryestimationprocedurebyexcludingmarkdownsfromthecalculationofthecost-to-retailpercentage.

Question9-12

WhenapplyingLIFO,ifinventoryincreasesduringtheyear,noneofthebeginninginventoryisassumedsold.Endinginventoryincludesthebeginninginventoryplusthecurrentyear’slayer.Todeterminelayers,wecompareendinginventoryatretailtobeginninginventoryatretailandassumethatnomorethanoneinventorylayerisaddedifinventoryincreases.Eachlayercarriesitsowncost-to-retailpercentagethatisusedtoconverteachlayerfromretailtocost.

AnswerstoQuestions（continued）

Question9-13

Freight-inisaddedtopurchasesinthecostcolumn.Netmarkupsareaddedintheretailcolumnbeforethecalculationofthecost-to-retailpercentage.Normalspoilageisdeductedintheretailcolumnafterthecalculationofthecost-to-retailpercentage.Ifsalesarerecordednetofemployeedis