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Inventories: Additional Issues 9 Learning Objective Lower of Cost or Market (LCM) Determining Market Value Determining Market Value Determining Market Value Lower of Cost or Market An item in inventory is currently carried at historical cost of $20 per unit. At year-end we gather the following per unit information: current replacement cost = $21.50 selling price = $30 cost to complete and dispose = $4 normal profit margin of = $5 How would we value this item in the Balance Sheet? Lower of Cost or Market Lower of Cost or Market Lower of Cost or Market Lower of Cost or Market Lower of Cost or Market Applying Lower of Cost or Market Adjusting Cost to Market - Options Record the Loss as a Separate Item in the Income Statement Adjust inventory directly or by using an allowance account. Record the Loss as part of Cost of Good Sold Adjust inventory directly or by using an allowance account. Learning Objective Inventory Estimation Techniques Estimate instead of taking physical inventory Less costly Less time consuming Two popular methods are . . . Gross Profit Method Retail Inventory Method Gross Profit Method Gross Profit Method Steps to the Gross Profit Method Estimate Historical Gross Margin %. Sales x (1 - Estimated Gross Margin %) = Estimated COGS Beg. Inventory + Net Purchases = Cost of Goods Available for Sale (COGAS) COGAS - Estimated COGS = Estimated Cost of Ending Inventory Gross Profit Method Gross Profit Method Learning Objective Retail Inventory Method This method was developed for retail operations like department stores. Uses both the retail value and cost of items for sale to calculate a cost to retail ratio. Retail Inventory Method Steps to the Retail Inventory Method Determine cost and retail value of goods sold. Calculate the cost-to-retail %. Retail value of goods available for sale - sales = ending inventory at retail. Cost-to-retail % x Ending inventory at retail = Estimated ending inventory at cost. Retail Inventory Method Retail Inventory