Inventory Valuation Issues

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Inventory Valuation Issues

• Sid Glandon, DBA, CPA
• Associate Professor of Accounting

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Lower of Cost or Market

• Historical cost principle is violated
• Conservative approach
• Recognize loss in period incurred not the period
  that the sale is made
• Lower of cost or market
• The lesser of
• Cost, or
• Designated market

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Designated Market

• Replacement cost
• But not more than the CEILING
• net realizable value
• Selling price less cost of completion and
  disposal
• Or less than the FLOOR
• net realizable value less normal profit margin

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Lower of Cost or Market

• If designated market is lower, record the loss
  using the
• Direct method
• Charge to inventory
• with the debit to cost of goods sold, or
• if material, loss on reduction to LCM
• Indirect method
• Charge an allowance account to reduce inventory
  to market

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Gross Profit Method of Estimating Inventory

• Assumptions
• Beginning inventory plus purchases equals goods
  available for sale
• Goods not sold must be on hand
• Goods available for sale less cost of goods sold
  (sales at cost) equals ending inventory

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Retail Inventory Method

• Used in retail
• Assumes
• High volume of sales
• Different types of merchandise
• Observable pattern between cost and prices
• Determine ending inventory at retail
• Convert to cost basis

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Analysis of Inventory

• Inventory turnover ratio
• Number of times on average the inventory was sold
  during the period
• Calculated as
• Cost of goods sold Average inventory

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Example Inventory turnover ratio

• Cost of goods sold 1,440,000
• Beginning inventory 150,000
• Ending inventory 170,000

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Example Inventory turnover ratio