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Session 10 Inventories-III

This session covers advanced inventory accounting concepts, specifically focusing on the Dollar Value LIFO method and the Retail Inventory Method. Learn how Dollar Value LIFO simplifies inventory valuation, minimizes liquidation risk, and helps maintain overall value. The Retail Inventory Method offers a more accurate estimation of inventory costs using retail information, including strategies for markdowns and averages. Gain insight into how these methodologies align with GAAP, and explore exceptions and applications in financial reporting and valuation strategies.

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Session 10 Inventories-III

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  1. Session 10 Inventories-III Intermediate Accounting I - Fall 2012

  2. Dollar Value LIFO-Attributes • Simplifies LIFO • Minimizes LIFO liquidation risk • Focuses on overall value Intermediate Accounting I - Fall 2012

  3. DVL-Methodology • Cost index • Base year valuation • Identification of layers • Conversion of layers to current cost • See p. 362 Intermediate Accounting I - Fall 2012

  4. Gross Profit Method-Estimation • Destroyed inventory • Interim reporting • Test of reasonableness • Planning • Not allowed for GAAP Intermediate Accounting I - Fall 2012

  5. Gross Profit Method Application • Estimate COGS using GP% or MU% • Apply standard inventory algorithm Intermediate Accounting I - Fall 2012

  6. Retail Inventory Method • More accurate than GP • Need retail information • Convert back to cost @ current cost/retail % • See p. 435ff • Allowed for GAAP Intermediate Accounting I - Fall 2012

  7. Retail Terminology • Initial markup • Additional markup • Markup cancellation • Markdown • Markdown cancellation Intermediate Accounting I - Fall 2012

  8. Retail Method Application • Average cost-p. 438 • Net markdowns before % calc. • LCM (Conventional Retail Method)-p. 438 • Net markdowns after % calc. • LIFO retail-p. 439 • Same as avg. cost but layer % calc. Intermediate Accounting I - Fall 2012

  9. Shortages, Freight & Empl. Discounts • Include freight only on cost side • Purchase returns deduct in both. • Purchase discounts, if gross method, deduct on cost side • Abnormal shortages (both) before % calc. • Normal shortages (retail) after % calc. • Sales discounts are not considered. • Employee discounts are added to net sales. Intermediate Accounting I - Fall 2012

  10. DVL Retail • Follow LIFO retail until ending inventory at retail • Index end. inventory and value new layers • See p. 465 Intermediate Accounting I - Fall 2012

  11. Inventory Changes & Errors • Changes-other than change to LIFO • Retrospective treatment • Change to LIFO • No special treatment; F/N disclosure • Material Errors • Restatement (not P&L) and F/N disclosure Intermediate Accounting I - Fall 2012

  12. Typical F/N Disclosure • Description of item • Justification • Yearly impact Intermediate Accounting I - Fall 2012

  13. Competency Check • Theory points-4 • Acquisition • Carrying method • Cost flow assumption • Valuation-LCM Intermediate Accounting I - Fall 2012

  14. Competency Check Cont. • Cost flow assumptions-10 • Average cost • Specific identification • FIFO • LIFO • DVL • Gross profit • Retail • Conventional retail • LIFO retail • DVL retail Intermediate Accounting I - Fall 2012

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