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CA 9.2 (Continued)
(c) Conan should use the loss method to disclose the decline in market value and avoid distorting cost
CA 9.3
(a) (1) Ogala’s inventory should be reported at net realizable value consistent with the LCNRV rule
since net realizable value is below original cost.
(2) The LCNRV rule is used to report the inventory in the statement of financial position 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 9.4
(a) The retail inventory method can be employed to estimate retail, wholesale, and manufacturing
finished goods inventories.
The valuation of inventory under this method is arrived at by reducing the ending inventory at retail
to an estimate of LCNRV. The retail value of ending inventory can be computed by (1) taking a
(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
exist, the cost ratio may not be appropriate for the merchandise in ending inventory and can result
in significant error.
CA 9.4 (Continued)
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.
Distortion of the ending inventory approximation under this method is often caused by an inadequate
system of inventory control. Adequate accounting controls are necessary for the accurate accumula-
tion of the data needed to arrive at a valid cost ratio. Physical controls are equally important
because, for interim purposes, this method is usually applied without taking a physical 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.
(d) The treatments to be accorded net markups and net markdowns must be considered in light of
their effects on the estimated cost ratio. If both net markups and net markdowns are used in
arriving at the cost ratio, ending inventory will be converted to an estimated average cost figure.
Excluding net markdowns will result in the inventory being stated at an estimate of the LCNRV.
CA 9.5
(a) (1) Olson’s inventoriable cost should include all costs incurred to get the lighting fixtures ready for
(2) No, administrative costs are assumed to expire with the passage of time and not to attach to
CA 9.5 (Continued)
(2) The net realizable value should be used to value the inventories because the net realizable
value is less than the cost. To carry the inventories at NRV provides a means of measuring
residual usefulness of an inventory expenditure.
(c) Olson’s beginning inventories at cost and at retail would be included in the calculation of the cost
ratio.
CA 9.6
(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
(b) If the loss is material, new and continuing shareholders are harmed by nonrecognition of the loss.
Cho’s position as an accounting professional also is affected if he accepts a financial report he
knows violates accounting standards.
(c) If the preponderance of the evidence points to a loss when the purchase is affected, the controller
should recognize the amount of the loss in the period in which the price decline occurs. In this case
FINANCIAL REPORTING PROBLEM
(a) Inventories are valued on a weighted average cost basis and carried at
the lower of cost and net realisable value. Cost includes all direct
expenditure and other attributable costs incurred in bringing inventories
(b) Inventories are reported on the statement of financial position simply
as “Inventories.” The footnotes indicate that all inventories are
finished goods.
Its gross profit percentages for 2016 and 2015 are as follows:
2016
2015
Net sales .............................
£10,555.4
£10,311.4
COMPARATIVE ANALYSIS CASE
(a) Puma reported inventories of €657 million, which represents 25.1 of
total assets. adidas reported inventories of €3,113 million, which
represents 23.3% of its total assets.
(b) Puma determines the cost of its inventories on the basis of acquisition
cost, using the average cost method, or manufacturing cost; its
(c) Puma classifies its inventories as raw materials and supplies, finished
goods and merchandise/inventory, and goods in transit. adidas
classifies its inventories as merchandise and finished goods on hand,
goods in transit, raw materials, and work in progress.
(d) Inventory turnover and days to sell inventory for 2015:
FINANCIAL STATEMENT ANALYSIS CASE
(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 a noncurrent asset probably because processing
takes more than one year.
(b) Sales are recorded as follows:
(c)
Statement of Financial Position
Income Statement
Inventory
Overstated
Cost of goods sold
Understated
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
(a)
Item
Units
Cost Per
Unit
Total
Cost
NRV Per
Unit
Total
NRV
LCNRV
Residential
500
*
$245,000*
$550
$275,000
$245,000
(b) $725,000 since NRV is less than cost.
ANALYSIS
The individual-product approach is better because Englehart expects that
PRINCIPLES
RESEARCH CASE
(a) The objective of IAS 2 is to prescribe the accounting treatment for
inventories. A primary issue in accounting for inventories is the
(b) Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) Net realisable value refers to the net amount that an entity expects to
realise from the sale of inventory in the ordinary course of business.
Fair value reflects the amount for which the same inventory could be
RESEARCH CASE (Continued)
(d) IAS 2 does not apply to the measurement of inventories held by:
(a) producers of agricultural and forest products, agricultural produce
after harvest, and minerals and mineral products, to the extent that
they are measured at net realisable value in accordance with well-
GAAP CONCEPTS and APPLICATION
9.1. Key Similarities are (1) the guidelines on who owns the goods—goods in transit, consigned
goods, special sales agreements, and the costs to include in inventory are essentially accounted
for the same under IFRS and U.S. GAAP; (2) use of specific identification cost flow assumption,
where appropriate; (3) unlike property plant and equipment, IFRS does not permit the option of
9.2. Under IFRS, LaTour’s inventory turnover is computed as follows:
Cost of Goods Sold €578
= = 3.75 or approximately 97 days (365 ÷ 3.75).
Average Inventory €154
Difficulties in comparison to a company using U.S. GAAP could arise if the U.S. company uses the
LIFO cost flow assumption, which is prohibited under IFRS. Generally in times of rising prices,
9.3. Reed must not be aware of the important convergence issue arising from the use of the LIFO cost
flow assumption; IFRS specifically prohibits its use. Conversely, the LIFO cost flow assumption is
widely used in the United States because of its favorable tax advantages. In addition, many argue
that LIFO from a financial reporting point of view provides a better matching of current costs
