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DOLLAR-VALUE LIFO RETAIL METHOD
➢ Using the LIFO retail method in combination with dollar-
value LIFO is referred to as the dollar-value LIFO retail
method.
On January 1, 2016, the Nicholson Department Store adopted
the dollar-value LIFO retail inventory method. Inventory
transactions at both cost and retail and cost indexes for 2016 and
2017 are as follows:
2016 2017
Cost Retail Cost Retail
January 1, 2016 $16,000 $24,000
Required:
Estimate the 2016 and 2017 ending inventory and cost of goods
T9-13
9-20 Intermediate Accounting,8/e
DOLLAR-VALUE LIFO RETAIL METHOD
(continued)
2016
2017
Cost
Retail
Cost
Retail
Beginning inventory
$16,000
$24,000
$17,456
$28,000
Plus: Net purchases
42,000
58,500
45,000
58,700
Base layer $16,000
2016
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
$28,000
$28,000 = $25,926 $24,000 (base) x 1.00 x 66.67% = $16,000
2017
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
T9-13(continued)
9-22 Intermediate Accounting,8/e
MOST INVENTORY CHANGES
➢ A change in inventory method, other than a change to LIFO,
is accounted for retrospectively by reporting all previous
periods’ financial statements as if the new inventory method
had been used in all prior periods.
➢ In addition, a disclosure note describes the change and
justification for the change along with the effects of the
change on items not reported on the face of the primary
statements, as well as any per share amounts affected for the
current period and all prior periods presented.
T9-14
MOST INVENTORY CHANGES
(continued)
Disclosure of Change in Inventory Method —
CVS Caremark Corporation
2.Change in Accounting Principle (in part)
Prior to 2012, the Company valued prescription drug inventories on a first-in, first-out
(“FIFO”) basis in retail pharmacies using the retail inventory method and in
distribution centers using the FIFO cost method. Effective January 1, 2012, all
Illustration 9-15
T9-14 (continued)
A CHANGE TO THE LIFO METHOD
➢ Accounting records usually are inadequate for a company
changing to LIFO to calculate the income effect on prior
years.
➢ Instead, the LIFO method simply is used from that point on.
➢ A disclosure note explains (a) the nature of and justification
for the change, (b) the effect of the change on current year's
income and earnings per share, and (c) why retrospective
application was impracticable.
Change in Inventory Method Disclosure —Seneca Foods Corporation
10. Inventories (in part)
The Company decided to change its inventory valuation method from the FIFO method to
the LIFO method. In the high inflation environment that the Company is experiencing, the
Company believes that the LIFO inventory method is preferable over the FIFO method
because it better compares the cost of current production to current revenue. Selling prices
Illustration 9-16
INVENTORY ERRORS
➢ If a material inventory error is discovered in an accounting
period subsequent to the period in which the error is made,
any previous year's financial statements that were incorrect as
a result of the error are retrospectively restated to reflect the
correction.
► Incorrect balances are corrected.
► A correction to retained earnings is reported as a prior
period adjustment.
► A disclosure note describes the nature and impact of the
error.
➢ When analyzing inventory errors, it's helpful to visualize the
ways cost of goods sold, net income, and retained earnings are
determined.
Beginning inventory
Plus: Net purchases
Less: Ending inventory Revenues
Illustration 9-17
T9-16
9-26 Intermediate Accounting,8/e
INVENTORY ERRORS
(continued)
The Barton Company uses a periodic inventory system. At the
end of 2015, a mathematical error caused an $800,000
overstatement of ending inventory. Ending inventories for 2016
and 2017 are correctly determined.
Analysis: U = Understated O = Overstated
2015 2016
Beginning inventory Beginning inventory O
Illustration 9-18
T9-16(continued)
PURCHASE COMMITMENTS
➢ Purchase commitments are contracts that obligate a company to
purchase a specified amount of merchandise or raw materials at
specified prices on or before specified dates.
In July 2016, the Lassiter Company signed two purchase commitments.
Illustration 9A-1
Contract Period within Fiscal Year (the first commitment)
► If market price is equal to or greater than the contract price, the purchase
is recorded at the contract price.
► If market price is less than the contract price, the purchase is recorded at
the market price. Assuming a market price of $425,000, the following
entry records the purchase:
Inventory (market price) .............................................. 425,000
T9-17
PURCHASE COMMITMENTS
(continued)
Contract Period Extends beyond Fiscal Year (the second commitment)
► If the market price at year-end is less than the contract price for
outstanding purchase commitments, a loss and a corresponding liability
are recorded for the difference. Assuming a year-end market price for the
second purchase commitment of $540,000, the following adjusting entry is
recorded:
December 31, 2016
Estimated loss on purchase commitment
The Purchase
► If market price on purchase date has not declined from year-end price, the
purchase is recorded at the year-end market price.
Inventory (accounting cost) .............................................. 540,000
► If market price on purchase date declines from year-end price, the
purchase is recorded at the market price. Assuming the market price
declines to $510,000, the following adjusting entry records the purchase:
Inventory (market price) ................................................... 510,000
Suggestions for Class Activities
1. Research Activity
The Gymboree Corporation is one of the largest children’s apparel specialty retailers in North
America. Have students, individually or in groups, go to Edgar at www.sec.gov. Ask them to:
A. Find their way to the financial statements and notes for the most recent fiscal year.
B. Identify and explain the method(s) used to value inventories.
C. Assume that in the most recent fiscal year the company discovered that last year's ending
inventory was overvalued by $10 million due to a mathematical error and:
1. Describe the accounting treatment of the error.
2. Determine the effect of the error on income before taxes for the current and prior years.
D. Assume that the company decided to switch its inventory method to FIFO. Explain the
accounting treatment for the change.
Points to note:
In its financial statement for the fiscal year ended February 1, 2014, Gymboree reported that
merchandise inventories are valued using the weighted average cost method.
2. Research Activity
PMX Communities is involved in the development of opportunities within the retail gold sales and
gold mining industries. During its fiscal year ended December 31, 2013, the company recorded an
inventory write-down.
Suggestions:
Have the class access the financial statements of PMX Communities using Edgar at:
1. What was the amount of the inventory write-down?
2. Where was the write-down reported in the income statement?
3. What are the reporting alternatives? Discuss the pros and cons of each alternative.
4. What prompted the write-down?
Points to Note:
In a separate line item in its income statement, the company reported an inventory write-down of
$65,076. Disclosure Note 3 – Inventory, attributed the write-down to gold pricing.
3. Professional Skills Development Activities
9-30 Intermediate Accounting,8/e
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis and judgment skills.
Communication Skills. In addition to Communication Cases 9-5 and 9-9, Analysis Case 9-6 can
be adapted to ask students to write a memo explaining the required treatment and disclosures.
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice,
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for making
business and investment decisions. This chapter includes Analysis Cases 9-6 and 9-12 (based
on the appendix).
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
students to critically analyze issues to apply concepts learned to business situations in order to
4. Ethical Dilemma
The chapter contains the following ethical dilemma:
ETHICAL DILEMMA
The Hartley Paper Company, owned and operated by Bill Hartley, manufactures and sells different
types of computer paper. The company has reported profits in the majority of years since the
company’s inception in 1972 and is projecting a profit in 2016 of $65,000, down from $96,000 in
2015.
Near the end of 2016, the company is in the process of applying for a bank loan. The loan
proceeds will be used to replace manufacturing equipment necessary to modernize the
manufacturing operation. In preparing the financial statements for the year, the chief accountant,
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—The Facts:
The Hartley Paper Company has reported profits in prior years, but projects decreased profit for
2016. At the end of 2016 the company applies for a loan to replace equipment and modernize
operations. Approximately $40,000 of the paper inventory has become obsolete and should be
written off in 2016. The owner, Bill Hartley, is considering waiting until 2017 to write down the
inventory so that 2016 income is favorable and the bank will not refuse to provide the loan. Assets
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the chief accountant's obligation to his employer to
improve the company's financial position to the bank is greater than his obligation to provide
information that is not misleading to users of the financial statements.
Step 3—Values:
Values include competence, honesty, integrity, objectivity, loyalty to the company, and
responsibility to users of financial statements.
9-32 Intermediate Accounting,8/e
Step 4—Alternatives:
1. Keep the inventory at its current value.
Step 5–Evaluation of Alternatives in Terms of Values:
1. Alternative 1 illustrates loyalty to Hartley and the company.
2. Alternative 2 exhibits values of competence, honesty, integrity, objectivity, and responsibility
Step 6—Consequences:
Alternative 1
Positive consequences: The bank would probably grant the loan, the company would be
modernized and remain competitive, and employees would keep their jobs.
Alternative 2
Positive consequences: Users of financial statements, including the bank, would receive more
relevant and reliable net income and balance sheet figures for 2016. The chief accountant would
maintain his integrity.
Alternative 3
Positive consequences: The chief accountant maintains his integrity and avoids conflict with
Hartley.
Step 7—Decision:
Student(s) must decide their course of action.
Assignment Chart
Learning Est. time
Questions Objective(s) Topic (min.)
9-1
1
Lower of cost and net realizable value
5
9-2
1
Lower of cost and net realizable value
5
9-3
1
Lower of cost and net realizable value
5
9-4
2
Gross profit method
5
9-5
2
Gross profit method
5
9-6
3
Retail inventory method
5
9-7
2,3
Gross profit and retail methods compared
5
9-8
3
Retail terms
5
9-9
3
Retail inventory method; average cost
5
9-10
4
Conventional retail method
5
9-11
3
LIFO retail inventory method
5
9-12
3
Retail inventory method
5
9-13
3,5
Retail method using LIFO compared to DVL
retail
5
9-14
6
Change in inventory method
5
9-15
6
Change in inventory method involving LIFO
5
9-16
7
Inventory errors
5
9-17
7
Inventory errors
5
9-18
8
IFRS; lower of cost and net realizable value
5
9-19
A
Purchase commitments [Based on Appendix]
5
9-20
A
Purchase commitments [Based on Appendix]
5
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
9-1
1
Lower of cost and net realizable value
5
9-2
1
Lower of cost and net realizable value
5
9-3
2
Gross profit method
10
9-4
2
Gross profit method; solving for unknown
10
9-5
3
Retail inventory method; average cost
10
9-6
3
Retail inventory method; LIFO
10
9-7
4
Conventional retail method
10
9-8
4
Conventional retail method
15
9-9
5
Dollar-value LIFO retail
15
9-10
5
Dollar-value LIFO retail
15
9-11
6
Change in inventory costing methods
10
9-12
6
Change in inventory costing methods
10
9-13
7
Inventory error
10
9-14
7
Inventory error
10
Learning Est. time
Exercises Objective(s) Topic (min.)
9-34 Intermediate Accounting,8/e
9-1
1
Lower of cost and net realizable value
15
9-2
1
Lower of cost and net realizable value
15
9-3
1
Lower of cost and net realizable value
15
9-4
3,6,7
FASB codification research
20
9-5
2
Gross profit method
15
9-6
2
Gross profit method
15
9-7
2
Gross profit method
15
9-8
2
Gross profit method
20
9-9
2
Gross profit method; solving for unknown cost %
15
9-10
3
Retail inventory method; average cost
20
9-11
4
Conventional retail method
20
9-12
3
Retail inventory method; LIFO
20
9-13
4
Conventional retail method; normal spoilage
25
9-14
3,4
Conventional retail method; employee discounts
25
9-15
3
Retail inventory method; solving for unknowns
30
9-16
5
Dollar-value LIFO retail
25
9-17
5
Dollar-value LIFO retail
20
9-18
5
Dollar-value LIFO retail
20
9-19
5
Dollar-value LIFO retail; solving for unknowns
35
9-20
6
Change in inventory costing methods
15
9-21
6
Change in inventory costing methods
15
9-22
7
Error correction; inventory error
20
9-23
7
Inventory errors
15
9-24
7
Inventory error
20
9-25
7
Inventory errors
20
9-26
1,2,3,4,5,6,7
Concepts; terminology
15
9-27
A
Purchase commitments [Based on Appendix]
15
9-28
A
Purchase commitments [Based on Appendix]
15
CPA/CMA Learning Est. time
Exam Questions Objective(s) Topic (min.)
CPA-1
1
Lower of cost and net realizable value
3
CPA-2
2
Gross profit method
3
CPA-3
4
Conventional retail method
3
CPA-4
7
Inventory errors
3
CPA-5
8
IFRS
3
CMA-1
4
Conventional retail method
3
CMA-2
7
Inventory errors
3
CMA-3
7
Inventory errors
3
Learning Est. time
Problems Objective(s) Topic (min.)
9-1
1
Lower of cost and net realizable value
20
9-2
1
Lower of cost and net realizable value
20
9-3
2
Gross profit method
20
9-4
3,4
Retail inventory method; various cost methods
35
9-5
3,4
Retail inventory method; conventional and LIFO
35
9-6
4
Retail inventory method; conventional
25
9-7
3,4
Retail method; average cost and conventional
20
9-8
5
Dollar-value LIFO retail method
20
9-9
5
Dollar-value LIFO retail method
20
9-10
3,4,5
Retail inventory method; various applications
45
9-11
3,4,5
Retail inventory method; various applications
45
9-12
6
Change in methods
25
9-13
7
Inventory errors
25
9-14
7
Inventory errors
25
9-15
7
Integrating problem, Chapters 8 and 9; inventory
errors
40
9-16
A
Purchase commitments [Based on Appendix]
25
Star Problems
Learning Est. time
Cases Objective(s) Topic (min.)
Judgment Case 9-1
1,3,4
Inventoriable costs; lower of cost and net
realizable value; retail inventory method
25
Communication Case 9-2
1
Lower of cost and net realizable value
20
Integrating Case 9-3
1
Unit LIFO and lower of cost and net realizable
value
25
Judgment Case 9-4
3,4
The dollar-value LIFO method; the retail
inventory method
15
Communication Case 9-5
3,4
Retail inventory method
45
Analysis Case 9-6
6
Change in inventory method
35
Real World Case 9-7
6
Change in inventory method; Abercrombie &
Fitch
20
Real World Case 9-8
1,5,6
Various inventory issues; Chapters 8 and 9;
Fred’s Inc.
45
Communication Case 9-9
6
Change in inventory method; note disclosure
30
Judgment Case 9-10
7
Inventory errors
20
Ethics Case 9-11
7
Overstatement of ending inventory
30
Analysis Case 9-12
A
Purchase commitments [Based on Appendix]
20
Air France-KLM Case
8
IFRS; lower of cost and net realizable value;
Air France-KLM
10
