Question: Explain the rationale for the ceiling and floor in the lower-of-cost-or-market method of valuing inventories.
The ceiling and the floor under the method of lower-of-cost or market value helps in preventing the overstatement or understatement in the value of inventory.
The ceiling is also known as the upper limit, which is the net realizable value of the inventory, whereas the Floor is also known as the lower limit, which is the difference of net realizable value and the profit margin.
The maximum limit wherein the inventory value cannot exceed the net realizable value, helps in preventing the overstatement of inventory. In the given situation, if the replacement cost is higher than the net realizable value, then it will be not recorded at replacement cost, and the business will only be able to realize the selling price of the inventory less any disposal cost.
If the inventories are reported at replacement cost, then it will overstate the value of the inventory and will understate the loss.
The lower limit, wherein the value of cannot be below the difference between net realizable value and the profit margin. It is the minimum level that measures the price of inventory at which it can be sold and also earns a normal profit. If floor value is used, it will understate the value of the inventory, and overstate the loss.
In its 2015 annual report, Gap Inc. reported inventory of $1,889 million on January 31, 2015, and $1,928 million on February 1, 2014, cost of goods sold of $10,146 million for 2015, and net sales of $16,435 million. Compute Gap’s inventory turnover and the average days to sell inventory for the fiscal year 2015
Gheorghe Moresan Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware and fittings 40% On August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction. Lumber Millwork Hardware Inventory, Jan. 1, 2017 $ 250,000 $ 90,000 $ 45,000 Purchases to Aug. 18, 2017 1,500,000 375,000 160,000 Sales revenue to Aug. 18, 2017 2,080,000 533,000 210,000 Exercises 479 480 Chapter 9 Inventories: Additional Valuation Issues Instructions Submit your estimate of the inventory amounts immediately preceding the fire.
John Olerud Ltd., a local retailing concern in the Bronx, New York, has decided to change from the conventional retail inventory method to the LIFO retail method starting on January 1, 2018. The company recomputed its ending inventory for 2017 in accordance with the procedures necessary to switch to LIFO retail. The inventory computed was $212,600. Instructions Assuming that John Olerud Ltd.’s ending inventory for 2017 under the conventional retail inventory method was $205,000, prepare the appropriate journal entry on January 1, 2018.
Kumar Inc. uses LIFO inventory costing. At January 1, 2017, inventory was $214,000 at both cost and market value. At December 31, 2017, the inventory was $286,000 at cost and $265,000 at market value. Prepare the necessary December 31 entry under (a) the cost-of-goods-sold method and (b) the loss method.
Reed Pentak, a finance major, has been following globalization and made the following observation concerning accounting convergence: “I do not see many obstacles concerning development of a single accounting standard for inventories.” Prepare a response to Reed to explain the main obstacle to achieving convergence in the area of inventory accounting
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