Intermediate accounting answer chapter9.docx
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Intermediate accounting answer chapter9.docx
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Intermediateaccountinganswerchapter9
Chapter9Inventories:
AdditionalIssues
AACSBassuranceoflearningstandardsinaccountingandbusinesseducationrequiredocumentationofoutcomesassessment.Althoughschools,departments,andfacultymayapproachassessmentanditsdocumentationdifferently,oneapproachistoprovidespecificquestionsonexamsthatbecomethebasisforassessment.Toaidfacultyinthisendeavor,wehavelabeledeachquestion,exerciseandprobleminIntermediateAccounting,5ewiththefollowingAACSBlearningskills:
Questions
AACSBTags
Exercises(cont.)
AACSBTags
9-1
Reflectivethinking
9-10
Analytic
9-2
Reflectivethinking
9-11
Analytic
9-3
Reflectivethinking
9-12
Analytic
9-4
Reflectivethinking
9-13
Analytic
9-5
Reflectivethinking
9-14
Analytic
9-6
Reflectivethinking
9-15
Analytic
9-7
Reflectivethinking
9-16
Analytic
9-8
Reflectivethinking
9-17
Analytic
9-9
Reflectivethinking
9-18
Analytic
9-10
Reflectivethinking
9-19
Analytic
9-11
Reflectivethinking
9-20
Analytic,Communications
9-12
Reflectivethinking
9-21
Analytic
9-13
Reflectivethinking
9-22
Analytic,Communications
9-14
Reflectivethinking,Communications
9-23
Analytic
9-15
Reflectivethinking
9-24
Analytic
9-16
Reflectivethinking,Communications
9-25
Reflectivethinking
9-17
Reflectivethinking
9-26
Analytic
9-18
Analytic
9-27
Analytic
9-19
Reflectivethinking
CPA/CMA
9-20
Reflectivethinking
9-1
Analytic
BriefExercises
9-2
Analytic
9-1
Analytic
9-3
Analytic
9-2
Analytic
9-4
Analytic
9-3
Analytic
9-5
Analytic
9-4
Analytic
9-6
Analytic
9-5
Analytic
9-1
Reflectivethinking
9-6
Analytic
9-2
Analytic
9-7
Analytic
9-3
Analytic
9-8
Analytic
Problems
9-9
Analytic
9-1
Analytic
9-10
Analytic
9-2
Analytic
9-11
Analytic,Communications
9-3
Analytic
9-12
Reflectivethinking,Communications
9-4
Analytic
9-13
Analytic
9-5
Analytic
9-14
Analytic,Communications
9-6
Analytic
Exercises
9-7
Analytic
9-1
Analytic
9-8
Analytic
9-2
Analytic
9-9
Analytic
9-3
Analytic
9-10
Analytic
9-4
Analytic
9-11
Analytic
9-5
Analytic
9-12
Analytic
9-6
Analytic
9-13
Analytic
9-7
Analytic
9-14
Analytic
9-8
Analytic
9-15
Analytic
9-9
Analytic
9-16
Analytic
QuestionsforReviewofKeyTopics
Question9-1
GAAPgenerallyrequiretheuseofhistoricalcosttovalueassets,butadeparturefromcostisnecessarywhentheutilityofanassetisnolongerasgreatasitscost.Theutilityorbenefitsfrominventoryresultfromtheultimatesaleofthegoods.Thisutilitycouldbereducedbelowcostduetodeterioration,obsolescence,orchangesinpricelevels.Toavoidreportinginventoryatanamountgreaterthanthebenefitsitcanprovide,thelower-of-cost-or-marketapproachtovaluinginventorywasdeveloped.Thisapproachresultsintherecognitionoflosseswhenthevalueofinventorydeclinesbelowitscost,ratherthanintheperiodinwhichthegoodsareultimatelysold.
Question9-2
ThedesignatedmarketvalueintheLCMruleisthemiddlenumberofreplacementcost(RC),netrealizablevalue(NRV)andnetrealizablevaluelessanormalprofitmargin(NRV-NP).ThisistheamountcomparedwithcosttodetermineLCM.
Question9-3
TheLCMdeterminationcanbemadebasedonindividualinventoryitems,onlogicalcategoriesofinventory,orontheentireinventory.
Question9-4
Thepreferredmethodistorecordthelossfromthewrite-downofinventoryasaseparateitemintheincomestatementratherthanincludingthewrite-downincostofgoodssold.Alessdesirablealternativeistoincludethelossincostofgoodssold.
Question9-5
Thegrossprofitmethodestimatescostofgoodssold,whichisthensubtractedfromcostofgoodsavailableforsaletoobtainanestimateofendinginventory.Theestimateofcostofgoodssoldisfoundbymultiplyingsalesbythehistoricalratioofcosttosellingprices.Thecostpercentageisthereciprocalofthegrossprofitratio.
Question9-6
Thekeytoobtainingaccurateestimateswhenusingthegrossprofitmethodisthereliabilityofthecostpercentage.Ifthecostpercentageistoolow,costofgoodssoldwillbeunderstatedandendinginventoryoverstated.Costpercentagesusuallyarebasedonrelationshipsofpastyears,whicharen’tnecessarilyrepresentativeofthecurrentrelationship.Failuretoconsidertheftorspoilagealsocouldcauseanoverstatementofendinginventory.
AnswerstoQuestions(continued)
Question9-7
Theretailinventorymethodfirstdeterminestheamountofendinginventoryatretailbysubtractingsalesfortheperiodfromgoodsavailableforsaleatretail.Endinginventoryatretailisthenconvertedtocostbymultiplyingitbythecost-to-retailpercentage.
Question9-8
Themaindifferencebetweenthegrossprofitmethodandtheretailinventorymethodisinthedeterminationofthecostpercentageusedtoconvertsalesatsellingpricestosalesatcost.Theretailinventorymethodusesacostpercentage,calledthecost-to-retailpercentage,whichisbasedonacurrentrelationshipbetweencostandsellingprice.Thegrossprofitmethodreliesonpastdatatoreflectthecurrentcostpercentage.
Question9-9
Initialmarkup—Originalamountofmarkupfromcosttosellingprice.
Additionalmarkup—Increaseinsellingpricesubsequenttoinitialmarkup.
Markupcancellation—Eliminationofanadditionalmarkup.
Markdown—Reductioninsellingpricebelowtheoriginalsellingprice.
Markdowncancellation—Eliminationofamarkdown.
Question9-10
Whenusingtheretailmethodtoestimateaveragecost,thecost-to-retailpercentageisdeterminedbydividingtotalcostofgoodsavailableforsalebytotalgoodsavailableforsaleatretail.Byincludingbeginninginventoryinthecalculationofthecost-to-retailpercentage,thepercentagereflectstheaveragecost/retailrelationshipforallinventory,notjusttheportionacquiredinthecurrentperiod.
Question9-11
Thelower-of-cost-or-market(LCM)retailvariationcombinedwiththeaveragecostmethodiscalledtheconventionalretailmethod.TheLCMruleisincorporatedintotheretailinventoryestimationprocedurebyexcludingmarkdownsfromthecalculationofthecost-to-retailpercentage.
Question9-12
WhenapplyingLIFO,ifinventoryincreasesduringtheyear,noneofthebeginninginventoryisassumedsold.Endinginventoryincludesthebeginninginventoryplusthecurrentyear’slayer.Todeterminelayers,wecompareendinginventoryatretailtobeginninginventoryatretailandassumethatnomorethanoneinventorylayerisaddedifinventoryincreases.Eachlayercarriesitsowncost-to-retailpercentagethatisusedtoconverteachlayerfromretailtocost.
AnswerstoQuestions(continued)
Question9-13
Freight-inisaddedtopurchasesinthecostcolumn.Netmarkupsareaddedintheretailcolumnbeforethecalculationofthecost-to-retailpercentage.Normalspoilageisdeductedintheretailcolumnafterthecalculationofthecost-to-retailpercentage.Ifsalesarerecordednetofemployeediscounts,thediscountsareaddedtonetsalesbeforesalesaredeductedintheretailcolumn.
Question9-14
Thedollar-valueLIFOretailmethodeliminatesthestablepriceassumptionofregularretailLIFO.Ineffect,itcombinesdollar-valueLIFO(Chapter8)withLIFOretail.Beforecomparingbeginningandendinginventoryatretailprices,endinginventoryisdeflatedtobaseyearretailusingthecurrentyear’sretailpriceindex.Afteridentifyingthelayersinendinginventorywiththeyearstheywerecreated,inadditiontoconvertingretailpricestocostusingthecost-to-retailpercentage,thedollar-valueLIFOmethodrequiresthateachlayerfirstbeconvertedfrombaseyearretailtolayeryearretailusingtheyear’sretailpriceindex.
Question9-15
Changesininventorymethods,otherthanachangetotheLIFOmethod,arereportedretrospectively.Thismeansreportingallpreviousperiods’financialstatementsasifthenewinventorymethodhadbeenusedinallpriorperiods.
Question9-16
WhenacompanychangestotheLIFOinventorymethodfromanyothermethod,itusuallyisimpossibletocalculatetheincomeeffectonprioryears.TodosowouldrequireassumptionsastowhenspecificLIFOinventorylayerswerecreatedinyearspriortothechange.Asaresult,acompanychangingtoLIFOusuallydoesnotreportthechangeretrospectively.Instead,theLIFOmethodsimplyisusedfromthatpointon.ThebaseyearinventoryforallfutureLIFOdeterminationsisthebeginninginventoryintheyeartheLIFOmethodisadopted.
Question9-17
Ifamaterialinventoryerrorisdiscoveredinanaccountingperiodsubsequenttotheperiodinwhichtheerrorismade,anypreviousyears’financialstatementsthatwereincorrectasaresultoftheerrorareretrospectivelyrestatedtoreflectthecorrection.And,ofcourse,anyaccountbalancesthatareincorrectasaresultoftheerrorarecorrectedbyjournalentry.Ifretainedearningsisoneoftheincorrectaccounts,thecorrectionisreportedasapriorperiodadjustmenttothebeginningbalanceinthestatementofshareholders’equity.Inaddition,adisclosurenoteisneededtodescribethenatureoftheerrorandtheimpactofitscorrectiononnetincome,incomebeforeextraordinaryitem,andearningspershare.
AnswerstoQuestions(concluded)
Question9-18
2007:
Costofgoodssoldoverstated
Netincomeunderstated
Endingretainedearningsunderstated
2008:
Netpurchasesnoeffect
Costofgoodssoldunderstated
Netincomeoverstated
Endingretainedearningscorrect
Question9-19
Purchasecommitmentsarecontractsthatobligatethecompanytopurchaseaspecifieda
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