Question 9–1
Question 9–2
Question 9–3
Question 9–4
The gross profit method estimates cost of goods sold, which is then subtracted
Chapter 9 Inventories: Additional Issues
QUESTIONS FOR REVIEW OF KEY TOPICS
GAAP generally requires the use of historical cost to value assets, but a departure
from cost is necessary when the utility of an asset is no longer as great as its cost. The
utility or benefits from inventory result from the ultimate sale of the goods. This
If inventory write-downs are commonplace for a company, losses usually are
included in cost of goods sold. However, when a write-down is substantial and
9–2 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 9–5
The key to obtaining accurate estimates when using the gross profit method is the
Question 9–6
The retail inventory method first determines the amount of ending inventory at
Question 9–7
The main difference between the gross profit method and the retail inventory
Question 9–8
Initial markup—Original amount of markup from cost to selling price.
Question 9–9
When using the retail method to estimate average cost, the cost–to-retail
Answers to Questions (continued)
Question 9–10
The lower of cost and net realizable value retail variation combined with the
Question 9–11
When applying LIFO, if inventory increases during the year, none of the
Question 9–12
Freight-in is added to purchases in the cost column. Net markups are added in
Question 9–13
The dollar-value LIFO retail method eliminates the stable price assumption of
regular retail LIFO. In effect, it combines dollar–value LIFO (Chapter 8) with LIFO
Question 9–14
Changes in inventory methods, other than a change to the LIFO method, are
9–4 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 9–15
When a company changes to the LIFO inventory method from any other method,
Question 9–16
If a material inventory error is discovered in an accounting period subsequent to
the period in which the error is made, any previous years’ financial statements that
Answers to Questions (concluded)
Question 9–17
2014: Cost of goods sold overstated
Question 9–18
When applying the lower of cost and net realizable value rule for valuing inventory
according to IFRS, if circumstances reveal that an inventory write-down is no longer
Question 9–19
Purchase commitments are contracts that obligate the company to purchase a
Question 9–20
Purchases made pursuant to a purchase commitment are recorded at the lower of
contract price or market price on the date the contract is executed. A loss is
9–6 Intermediate Accounting, 8/e
Brief Exercise 9–1
Brief Exercise 9–2
(1)
(2)
Product
Cost
NRV (*)
Per Unit
Inventory
Value
[Lower of
(1) and (2)]
$50
$64
34
32
* Selling price less costs to sell.
Lower of
Cost and
Cost NRV
Product 1 (1,000 units) $50,000 $50,000
BRIEF EXERCISES
Brief Exercise 9–3
Beginning inventory (from records) $220,000
Plus: Net purchases (from records) 400,000
9–8 Intermediate Accounting, 8/e
Brief Exercise 9–4
Beginning inventory (from records) $150,000
Less: Cost of goods sold:
Net sales $700,000
Brief Exercise 9–5
Cost
Beginning inventory
$ 300,000
Plus: Net purchases
861,000
Freight-in
22,000
Net markups
Less: Net markdowns
Goods available for sale
1,183,000
Less: Net sales
Estimated ending inventory at retail
Estimated ending inventory at cost (70% x $490,000)
Estimated cost of goods sold
$ 840,000
9–10 Intermediate Accounting, 8/e
Brief Exercise 9–6
Cost
Retail
Beginning inventory
$ 300,000
$ 450,000
Plus: Net purchases
861,000
1,210,000
Freight-in
22,000
Net markups
Less: Net markdowns
Goods available for sale (excluding beg. Inventory)
Goods available for sale (including beg. Inventory)
1,183,000
Less: Net sales
(1,200,000)
Estimated ending inventory at retail
$ 490,000
Estimated ending inventory at cost:
Retail Cost
Beginning inventory $ 450,000 $ 300,000
Estimated cost of goods sold
$ 854,516
Brief Exercise 9–7
Cost
Beginning inventory
$ 300,000
Plus: Net purchases
861,000
Freight-in
22,000
Net markups
Goods available for sale
Less: Net markdowns
Goods available for sale
1,183,000
Less: Net sales
Estimated cost of goods sold
$ 843,626
9–12 Intermediate Accounting, 8/e
Brief Exercise 9–8
Cost
Retail
Beginning inventory
$220,000
Freight-in
Plus: Net markups
1,596,000
$877,800
Cost-to-retail percentage: = 55%
$1,596,000
Less: Net markdowns
_______
(6,000)
Goods available for sale
877,800
1,590,000
Less:
Estimated ending inventory at retail
Estimated cost of goods sold
Brief Exercise 9–9
Cost
Retail
Beginning inventory
$ 40,800
$ 68,000
Plus: Net purchases
155,440
270,000
Net markups
Less: Net markdowns
_______
Goods available for sale (excluding beginning inventory)
155,440
268,000
Goods available for sale (including beginning inventory)
Less: Net sales
(250,000)
Estimated ending inventory at current year retail prices
$ 86,000
Estimated ending inventory at cost (calculated below)
(50,451)
Estimated cost of goods sold
$145,789
___________________________________________________________________________
Step 1 Step 2 Step 3
Ending Ending Inventory Inventory
Inventory Inventory Layers Layers
at Year-End at Base Year at Base Year Converted to
Retail Prices Retail Prices Retail Prices Cost
9–14 Intermediate Accounting, 8/e
Brief Exercise 9–10
Cost
Retail
Beginning inventory
$ 50,451
$ 86,000
Plus: Net purchases
168,000
301,000
Net markups
3,000
Less: Net markdowns
_______
Goods available for sale (excluding beginning inventory)
168,000
300,000
Goods available for sale (including beginning inventory)
218,451
386,000
Less: Net sales
(280,000)
Estimated ending inventory at current year retail prices
$106,000
Estimated ending inventory at cost (calculated below)
Estimated cost of goods sold
$158,689
___________________________________________________________________________
Step 1 Step 2 Step 3
Ending Ending Inventory Inventory
Inventory Inventory Layers Layers
at Year-End at Base Year at Base Year Converted to
Retail Prices Retail Prices Retail Prices Cost
$106,000
$106,000 = $100,000 $68,000 (base) x 1.00 x 60%* = $40,800
Brief Exercise 9–11
Hopyard applies the FIFO cost method retrospectively; that is, to all prior periods
as if it always had used that method. In other words, all financial statement amounts
for individual periods that are included for comparison with the current financial
statements are revised for period-specific effects of the change.
Then, the cumulative effects of the new method on periods prior to those
presented are reflected in the reported balances of the assets and liabilities affected as
Brief Exercise 9–12
When a company changes to the LIFO inventory method from any other method,
it usually is impossible to calculate the income effect on prior years. To do so would
require assumptions as to when specific LIFO inventory layers were created in years
prior to the change. As a result, a company changing to LIFO usually does not report
9–16 Intermediate Accounting, 8/e
Brief Exercise 9–13
The 2014 error caused 2014 net income to be overstated, but since 2014 ending
Analysis of 2014 ending inventory error effects:
U = Understated
O = Overstated
2014 2015
Beginning inventory → Beginning inventory O
Plus: net purchases Plus: net purchases
Brief Exercise 9–13 (concluded)
However, the 2015 error has not yet self-corrected. Both retained earnings and
inventory still are overstated as a result of the second error.
Analysis of 2015 ending inventory error effects:
U = Understated
O = Overstated
2015
Beginning inventory
Plus: net purchases
Brief Exercise 9–14
The financial statements that were incorrect as a result of both errors (effect of
one error in 2014 and effect of two errors in 2015) would be retrospectively restated
9–18 Intermediate Accounting, 8/e
Exercise 9–1
(1)
(2)
Product
Cost
NRV (*)
Per Unit
Inventory Value
[Lower of (1)
and (2)]
1
$ 20
$34
$20
2
90
80
80
3
50
60
50
EXERCISES
Exercise 9–2
Requirement 1
(1)
(2)
Product
Cost
NRV
Inventory
Value
[Lower of
(1) and (2)]
101
$120,000
$100,000
$100,000
90,000
50,000
$300,000
9–20 Intermediate Accounting, 8/e
Exercise 9–3
(1)
(2)
Product
Cost
NRV (*)
Per Unit
Inventory
Value
[Lower of (1)
and (2)]
A
$40
$52**
$40
B
90
86
86
C
40
70
40
D
100
112
100
E
20
26
20