9-74
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.
(b) Sales are recorded as follows:
Accounts Receivable or Cash …………………….. XXX
Sales Revenue …………………………………….. XXX
AND
9-75
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
(a)
Residential pumps:
Cost of goods sold = $80,000 + $565,000 – $245,000 = $ 400,000
Commercial pumps:
Ending inventory at cost = (500 X $1,000) = $ 500,000
Total ending inventory at cost = $245,000 + $500,000 = $ 745,000
Total cost of goods sold = $1,305,000 + $400,000 = $1,705,000
Lower-of-cost-or-market:
Residential pumps
Commercial pumps
NRV
$580.00
$1,050.00
Replacement cost
$550.00
$900.00
Normal Profit Margin
0.1667 X $580.00 =
$96.69
0.1667 X $1,050.00 =
$175.04
$874.96
Designated market value
Designated market value
Required write-down
Total amount of inventory reported on March 31 balance sheet = $695,000
($245,000 + $450,000).
9-76
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
(b) Inventory at cost = $245,000 + $500,000 = $745,000
Designated market value = $275,000 + $450,000 = $725,000
$725,000 < $745,000, therefore write inventory down to $725,000
Analysis
In this problem, one product’s market value is above cost and the
other one is below. From a conservative perspective, the individual
product approach results in a write-down for any product whose
designated market value is below cost. So, potentially the individual
Principles
(a) If the designated market value is $1,050, the designated market value
of commercial pumps would be above cost. The written-down amount
becomes the new cost for that inventory and Englehart would not be
allowed to write that inventory back up.
9-77
PROFESSIONAL RESEARCH
(a) The codification provides guidance at: FASB ASC 330-10-05
(Codification String: Assets > 330 Inventory > 10 Overall > 05
Background). The primary predecessor literature is: “Restatement and
The term inventory embraces goods awaiting sale (the merchandise
of a trading concern and the finished goods of a manufacturer),
goods in the course of production (work in process), and goods to be
consumed directly or indirectly in production (raw materials and
supplies). This definition of inventories excludes long-term assets
9-78
PROFESSIONAL RESEARCH (Continued)
(c) According to the FASB ASC 330-10-20, the Glossary indicates the
35–15 Only in exceptional cases may inventories properly be stated
above cost. For example, precious metals having a fixed
50-3 Where goods are stated above cost this fact shall be fully
disclosed.
35–16 It is generally recognized that income accrues only at the time
of sale, and that gains may not be anticipated by reflecting
assets at their current sales prices. However, exceptions for
(1) Units of which are interchangeable
(2) Units of which have an immediate marketability at
quoted prices
(3) Units for which appropriate costs may be difficult to
obtain.
9-79
PROFESSIONAL SIMULATION
Resources
Journal Entry
Cost of Goods Sold ………………………………………………
4,000
Allowance to Reduce Inventory to Market ………
4,000
Note: This entry assumes use of the cost–of-goods-sold method.
Explanation
Expected selling prices are important in the application of the lower-of–
cost-or-market rule because they are used in measuring losses of utility in
9-80
IFRS CONCEPTS AND APPLICATION
IFRS9-1
Key similarities are (1) the guidelines on who owns the goods—goods in
transit, consigned goods, special sales agreements, and the costs to
Key differences are related to (1) the LIFO cost flow assumption—GAAP
permits the use of LIFO for inventory valuation. IFRS prohibits its use. FIFO
and average-cost are the only two acceptable cost flow assumptions
permitted under IFRS; (2) lower-of-cost-or-market test for inventory
valuation—IFRS defines market as net realizable value. GAAP on the other
9-81
IFRS9-2
As shown in the analysis below, under IFRS, LaTour’s inventory turnover
ratio is computed as follows:
IFRS9-3
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 against revenue and therefore a more realistic
income is computed.
9-82
IFRS9-4
(a) Biological assets are measured on initial recognition and at the end of
each reporting period at fair value less costs to sell (NRV). Companies
record a gain or loss due to changes in the NRV of biological assets
in income when it arises.
IFRS9-5
IFRS9-6
Net
Realizable
9-83
IFRS9-7
(a)
12/31/12
Cost of Goods Sold…………………………..
24,000
Allowance to Reduce Inventory
to NRV ……………………………………………………….
24,000
to NRV ……………………………………………………….
24,000
12/31/13
Allowance to Reduce Inventory
to NRV ……………………………………………………….
4,000*
Recovery of Loss Due to
Decline of Inventory …………………………..
4,000
*Cost of inventory at 12/31/12 …………………………..
Recovery of previously recognized loss
= (a) – (b)
= $24,000 – $20,000
= $4,000.
12/31/13
Allowance to Reduce Inventory to
Cost of Goods Sold …………………………..
Allowance to Reduce Inventory
9-84
IFRS9-8
Biological Assets – Shearing Sheep …………………
4,125*
Unrealized Holding Gain or
Loss – Income …………………………………….
4,125
(b)
Cash ………………………………………………………………
10,500
Cost of Goods Sold …………………………………………
9,000
Wool Inventory ……………………………………….
9,000
Sales ………………………………………………………
10,500
IFRS9-10
(a) The IFRS requirements related to accounting and reporting for
inventories is found in IAS 2 (Inventories), IAS 18 (Revenue) and IAS
41 (Agriculture).
This Standard applies to all inventories, except:
(a) work in progress arising under construction contracts, including
directly related service contracts (see IAS 11 Construction
Contracts);
(a)
Wool Inventory ……………………………………………….
Unrealized Holding Gain or
Loss – Income ……………………………………..
9-85
IFRS9-10 (Continued)
(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.
(d) This Standard 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 established practices in those industries. When such
IFRS9-11
(a) Inventories are valued at the lower–of-cost-or-net realisable value
using the retail method, which is computed on the basis of selling
price less the appropriate trading margin. All inventories are finished
goods.
9-86
IFRS9-11 (Continued)
(d)
Inventory turnover =
Cost of Sales
=
£5,918.1
Average Inventory
£613.2 + £536.0
2
= 10.30 or approximately 35 days to turn its inventory, which is
slightly lower than in 2009 (11.10 or 33 days). Overall, turnover
remains high.
M&S had a small improvement in its gross profit and a slight increase in
gross profit percentage. Sales in 2010 showed a 5.2% increase, due to