Accounting Chapter 9 Homework Accordingly Accounting Records Prior Years Usually Are

Problem 9–16 (concluded)

Requirement 3

9–76 Intermediate Accounting, 8/e

Judgment Case 9–1

1. Hudson should account for the warehousing costs related to its wholesale

inventories as part of inventory. All reasonable and necessary costs of preparing

2. a. The lower of cost and net realizable rule produces a more realistic estimate

of future cash flows to be realized from assets, which is consistent with the principle

3. Hudson’s freight-in costs should be included only in the cost amounts to

determine the cost–to–retail percentage. Hudson’s net markups should be included

4. By not deducting net markdowns from the retail amounts to determine the

cost-to-retail percentage, Hudson produces a lower cost–to-retail percentage than

CASES

Communication Case 9–2

Arguments for the lower of cost and net realizable approach versus historical cost

should focus on the loss of utility concept. A departure from cost is warranted when

the utility of an asset (its probable future economic benefits) is no longer as great as its

cost. The utility or benefits from inventory result from the ultimate sale of the goods.

So, deterioration, obsolescence, changes in price levels, or any situation that might

9–78 Intermediate Accounting, 8/e

Integrating Case 9–3

Requirement 1

YORK CO.

Schedule of Cost of Goods Sold

For the Year Ended December 31, 2016

Beginning inventory $ 65,600

Add: Purchases 368,900

YORK CO.

Supporting Schedule of Ending Inventory

December 31, 2016

Inventory at cost (LIFO):

Cost Total

Units per unit cost

Beginning inventory, January 1, 8,000 $8.20 $ 65,600

Requirement 2

Inventory should be valued at the lower of cost and net realizable value.

In this situation, because inventory valued at net realizable value ($176,000) is

Judgment Case 9–4

1. a. The advantages of using the dollar-value LIFO method are to reduce the

cost of accounting for inventory and to minimize the probability of liquidation of

2. a. Huddell’s net markups should be included only in the retail amounts

9–80 Intermediate Accounting, 8/e

Communication Case 9–5

Suggested Grading Concepts and Grading Scheme:

Content (70%)

______

30 Describes the method.

____ Determining ending inventory at retail.

Multiply ending inventory at retail by the cost percentage.

____ Markups and markdowns.

______ 10 Discusses the conditions that may distort results.

____ Possible inaccurate cost percentage.

Does not explicitly consider theft, breakage, etc.

______ 30 Describes the advantages of using the method when

compared to other methods.

____ Avoids physical inventory count.

____ Acceptable for financial reporting and income taxes.

____ Can explicitly incorporate cost flow methods, taxes,

and an approximation of lower of average cost and net

realizable value.

____

______ 70 points

Writing (30%)

______ 6 Terminology and tone appropriate to the audience of a company

president.

______ 12 Organization permits ease of understanding.

____ Introduction that states purpose.

____ Paragraphs that separate main points.

______ 12 English

____ Sentences grammatically clear and well organized,

concise.

____ Word selection.

____ Spelling.

____ Grammar and punctuation.

____

______ 30 points

Analysis Case 9–6

For changes not involving LIFO or changes from the LIFO method to another, the

event is accounted for as a normal change in accounting principle. In general, we

report voluntary changes in accounting principles retrospectively. This means

revising all previous periods’ financial statements as if the new method were used in

The advantage of retrospective application is to enhance comparability of the

statements from year to year. The recast statements appear as if the newly adopted

accounting method had been applied in all previous years.

Consistency and comparability suggest that accounting choices once made should

be consistently followed from year to year. So, any change requires that the new

method be justified as clearly more appropriate. In the first set of financial statements

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Real World Case 9–7

We report most voluntary changes in accounting principles retrospectively. This

means recasting all previous periods’ financial statements as if the new method were

used in those periods. For each year in the comparative statements reported, we revise

Real World Case 9–8

Requirement 1

Inventories are valued using the retail first-in, first-out method for goods in stores

and the first-in, first-out cost method for goods in distribution centers. For pharmacy

department inventories, cost is determined using the dollar-value LIFO retail method.

Requirement 2

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Case 9–8 (concluded)

Requirement 5

For changes not involving LIFO or changes from the LIFO method to another, the

event is accounted for as a normal change in accounting principle. In general, we

report voluntary changes in accounting principles retrospectively. This means

Communication Case 9–9

Requirement 1

Change in Inventory Method

During 2016, the Company changed the method of valuing its inventories from the

first-in, first-out (FIFO) method, to the last-in, first-out (LIFO) method, determined

by the retail method. To estimate the effects of changing retail prices on

inventories, the Company utilizes internally developed price indexes. The impact

Requirement 2

It usually is impracticable to calculate the cumulative effect of a change to LIFO.

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Judgment Case 9–10

Despite the self-correcting feature of certain inventory errors, the errors cause the

financial statements of the year of the error as well as the financial statements in the

subsequent year to be incorrect. For example, an overstatement of ending inventory at

the end of 2015 will correct itself in 2016 and retained earnings at the end of 2016 will

Ethics Case 9–11

Requirement 1

Bonuses will be negatively affected because if the error is corrected, a lower

Requirement 2

It will be reported as a prior period adjustment to the beginning retained earnings

Requirement 3

Ethical Dilemma:

Should John recognize his obligation to disclose the inventory error to Danville

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Analysis Case 9–12

GAAP requires that purchase commitments be evaluated in the same way as

inventory on hand for the purpose of determining any lower of cost and net realizable

value adjustment. Purchases are recorded at market price when market price is lower

Air France-KLM Case

No. Both U.S. GAAP and IFRS require inventory to be valued at the lower of