*PROBLEM 9.14
(a)
Cost
Retail
Inventory (beginning) ………………….
$ 15,800
$ 24,000
Purchases ………………………………….
116,200
184,000
Markups …………………………………….
12,000
Totals ………………………………..
$132,000
220,000
Markdowns ………………………………..
Sales revenue …………………………….
Ending inventory at retail ……………
Ending inventory at cost (60% X $39,500)
(b)
Ending inventory for 2020 under the LIFO method:
The cost-to-retail ratio for 2020 can be computed as follows:
Beginning inventory …………..
Increment in 2020 ………………
Ending inventory ……………….
*$39,500 – $24,000 = $15,500
*PROBLEM 9.15
(a) DAVENPORT DEPARTMENT STORE
COMPUTATION OF COST
OF DECEMBER 31, 2019 INVENTORY
BASED ON THE CONVENTIONAL RETAIL METHOD
At Cost
At Retail
Beginning inventory, January 1, 2019 …………..
$ 29,800
$ 56,000
Add (deduct) transactions affecting cost ratio:
Purchases ………………………………………….
311,000
554,000
Purchase returns ……………………………….
(5,200)
(10,000)
Purchase discounts …………………………...
Freight-in …………………………………………..
Net markups ………………………………………
20,000
Add (deduct) other retail transactions not
considered in computation of cost ratio:
Gross sales ……………………………………….
Sales returns ……………………………………..
Net markdowns ………………………………….
Employee discounts …………………………..
Totals …………………………………………..
Inventory, December 31, 2019:
*PROBLEM 9.15 (Continued)
(b) COMPUTATION OF COST
OF DECEMBER 31, 2019 INVENTORY
UNDER THE LIFO RETAIL METHOD
Cost
Retail
Totals used in computing cost ratio under
conventional retail method (part a) …………….
$347,200
$620,000
Exclude beginning inventory ……………………….
29,800
56,000
Net purchases …………………………………………….
Deduct net markdowns ………………………………..
12,000
Totals used in computing cost ratio under
Cost ratio under LIFO retail method
($317,400 ÷ $552,000) ………………………………..
Inventory, December 31, 2019:
At cost under LIFO retail method
*PROBLEM 9.15 (Continued)
(c) COMPUTATION OF 2020 AND 2021
YEAR-END INVENTORIES
UNDER THE DOLLAR-VALUE LIFO METHOD
Computation of retail values on the basis of January 1, 2020, price levels
Cost
Retail
2020:
Inventory at end of year (given) ……………….
$75,600
Inventory at end of year stated in terms
of January 1, 2020 prices
($75,600 ÷ 105%) ………………………………….
January 1, 2020 inventory base (given)
cost ratio of 55.5% ($33,300 ÷ $60,000) ….
Increment in inventory:
In terms of January 1, 2020 prices ……………
$12,000
In terms of 2020 prices—$12,000 X 105%….
$12,600
At LIFO cost—61% (2020 cost ratio) X
$12,600 ………………………………………………..
December 31, 2020 inventory at LIFO cost …………
2021:
Inventory at end of year (given) ………………
$62,640
Inventory at end of year stated in terms
of January 1, 2021 prices
($62,640 ÷ 108%) …………………………………
$58,000
December 31, 2021 inventory at LIFO
cost—55.5%* (January 1, 2020 cost
ratio) X $58,000 ……………………………………
$60,000 Retail
(Note to instructor: Because the retail inventory stated in terms of January 1,
2020 prices at December 31, 2021, $58,000, has fallen below the January 1,
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 9.1 (Time 15–25 minutes)
Purpose—to provide the student with an opportunity to discuss the purpose, the application, and the
CA 9.2 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to examine ethical issues related to lower–of-cost-
or NRV on an individual-product basis. A relatively straightforward case.
CA 9.3 (Time 15–20 minutes)
Purpose—to provide the student with a case that requires an application and an explanation of the
CA 9.4 (Time 15–20 minutes)
Purpose—to provide the student with a case that requires an application and an explanation of the lower-
CA 9.5 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to discuss the main features of the retail inventory
CA 9.6 (Time 15–25 minutes)
Purpose—the student discusses which costs are inventoriable, the theoretical arguments for the lower–
CA 9.7 (Time 10–15 minutes)
Purpose—to provide the student with a case that allows examination of ethical issues related to the
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 9.1
(a) The purpose of using the LCNRV method is to reflect the decline of inventory value below its
original cost. A departure from cost is justified on the basis that a loss of utility should be reported
as a charge against the revenues in the period in which it occurs.
(d) Conceptually, the LCNRV method has some deficiencies. First, decreases in the value of the asset
and the charge to expense are recognized in the period in which loss in utility occurs—not in the
period of sale. On the other hand, increases in the value of the asset are recognized only at the
point of sale. This situation is inconsistent and can lead to distortions in the presentation of
income.
CA 9.2
(a) The accountant’s ethical responsibility is to provide fair and complete financial information. In this
case, the cost-of–goods-sold method distorts the cost of goods sold and hides the decline in
market value.
CA 9.2 (Continued)
(c) Conan should use the loss method to disclose the decline in market value and avoid distorting cost
of goods sold. However, he faces an ethical dilemma if Ortiz will not accept the method Conan
CA 9.3
(a) Ogala’s inventory should be reported at net realizable value consistent with the LCNRV rule
since net realizable value is below original cost.
(b) The LCNRV rule is used to report the inventory in the balance sheet at its future utility value. It
CA 9.4
2. The lower-of-cost-or-NRV rule is used to report the inventory in the balance sheet at its future
utility value. It also recognizes a decline in the utility of inventory in the income statement in the
period in which the decline occurs.
CA 9.5
(a) The retail inventory method can be employed to estimate retail, wholesale, and manufacturing
finished goods inventories.
(b) Since the retail method is based on an estimated cost ratio involving total merchandise available
during the period, its validity depends on the underlying assumption that the merchandise in
ending inventory is a representative mixture of all merchandise handled. If this condition does not
Seasonal variations in the rate of markup will nullify the ending inventory “representative mix”
assumption. Since the estimated cost ratio is based on total merchandise handled during the
period, the same rate of markup should prevail throughout the period. Because of seasonal
variations it may be necessary to use data for the last six months, quarter, or month to compute a
cost ratio that is appropriate for ending inventory.
(c) The advantages of using the retail method as compared to cost methods include the following:
1. Approximate inventory values can be determined without maintaining perpetual inventory records.
5. The cost of merchandise can be kept confidential in intracompany transfers.
(d) The treatments to be accorded net markups and net markdowns must be considered in light of
CA 9.5 (Continued)
The lower cost ratio arrived at by excluding net markdowns permits the pricing of inventory at an
amount that reflects its current utility. The assumption is that net markdowns represent a loss of
CA 9.6
(a) 1. Olson’s inventoriable cost should include all costs incurred to get the lighting fixtures ready for
sale to the customer. It includes not only the purchase price of the fixtures but also the other
(b) 1. The lower-of-cost-or-market rule is used for valuing inventories because of the concept of
prudence or conservatism and because the decline in the utility of the inventories below their
cost should be recognized as a loss in the current period.
CA 9.7
(a) Accounting standards require that when a contracted price is in excess of market, as it is in this
case (market is $5,000,000 and the contract price is $6,000,000), and it is expected that losses will
occur when the purchase is effected, losses should be recognized in the period during which such
CA 9.7 (Continued)
(c) If the preponderance of the evidence points to a loss when the purchase is effected, the controller
should recognize the amount of the loss in the period in which the price decline occurs. In this case
the loss is measured at $1,000,000 and recorded as follows:
FINANCIAL REPORTING PROBLEM
(a) Inventories are valued at the lower-of-cost–or-market value. Product-
related inventories are primarily maintained on the first-in, first-out
method. The cost of spare part inventories is maintained using the
average cost method.
(b) Inventories are reported on the balance sheet simply as “inventories”
(d)
Inventory turnover =
Cost of Goods Sold
=
$23,535
Average Inventory
($4,624 + $4,716)
2
= 7.0 or approximately 52 days to turn its inventory, which is
slightly higher than in 2016 (6.8 or 54 days).
Its gross profit percentages for 2017 and 2016 are as follows:
2017
2016
Net sales ………………………
$65,058
$65,299
Gross profit ………………….
Gross profit percentage …
COMPARATIVE ANALYSIS CASE
(a) Coca-Cola reported inventories of $2,655 million, which represents 3.0%
of total assets. PepsiCo reported inventories of $2,947 million, which
represents 3.7% of its total assets.
(b) Coca-Cola determines the cost of its inventories on the basis of average
cost or first-in, first-out (FIFO) methods; its inventories are valued at
(d) Inventory turnover ratios and days to sell inventory for 2017:
Coca-Cola
PepsiCo
FINANCIAL STATEMENT ANALYSIS CASE 1
(a) It may provide this information (although it is not required to do so)
because it believes that this information tells the reader that both its
income and inventory would be higher if FIFO had been used.
(b) The LIFO liquidation reduces operating costs because low price goods
(c) It would probably have reported more income if it had been on a FIFO
basis. For example, its inventory as of December 31, 2020 was stated
FINANCIAL STATEMENT ANALYSIS CASE 2
(a) There are probably no finished goods because gold is a highly liquid
commodity, and so it can be sold as soon as processing is complete.
Ore in stockpiles is probably a noncurrent asset because processing
takes more than one year.
(b) Sales are recorded as follows:
(c)
Balance Sheet
Income Statement
Inventory
Overstated
Cost of goods sold
Understated
Working capital
Overstated
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
(a)
Residential pumps:
Commercial pumps:
Ending inventory at cost = (500 X $1,000) = $ 500,000
Lower-of-cost-or-NRV:
Residential pumps
Commercial pumps
NRV per unit
$580
$900
Number of units on hand,
Mar. 31
500
500