会计英语（简明版） Lesson 6 Inventory and Cost of Goods Sales.ppt

YE SUN AccountingEnglish@2009 * Lower of Cost or Market (LCM) Market price may be below cost due to: Physical deterioration. Change in consumer tastes. Technological obsolescence. LCM is a reflection of conservatism concept. Market is defined as net realizable value YE SUN AccountingEnglish@2009 * Net realizable value (NRV) NRV = estimated selling price - estimated costs of selling. So inventory not above cash that will be received. YE SUN AccountingEnglish@2009 * Steps in Applying LCM Compute market, Select lower of cost or market. YE SUN AccountingEnglish@2009 * Inventory estimation method YE SUN AccountingEnglish@2009 * The Gross Profit Method Determine cost of goods available for sale. Estimate cost of goods sold by multiplying the net sales by the cost ratio. Deduct cost of goods sold from cost of goods available for sale to determine ending inventory. YE SUN AccountingEnglish@2009 * The Gross Profit Method Example In March of 1999, Chemico’s inventory was destroyed by fire. Chemico’s normal gross profit ratio is 30% of net sales. At the time of the fire, Chemico showed the following balances: YE SUN AccountingEnglish@2009 * The Gross Profit Method Example Estimate Cost of Goods Sold. YE SUN AccountingEnglish@2009 * The Gross Profit Method Example Since gross margin = 30%, then the COGS ratio must be 70%. YE SUN AccountingEnglish@2009 * The Gross Profit Method Example × 70% YE SUN AccountingEnglish@2009 * Retail Method Variation of perpetual method. Record purchases at cost and at retail. Calculate gross margin percent and its complement (the cost of goods sold as a percent of retail). Cost of goods sold = Retail sales for the period * cost of goods sold percent. Ending inventory = Beginning inventory + purchases -cost of goods sold. YE SUN AccountingEnglish@2009 * Analysis of Inventory Inventory turnover = Cost of goods sold / Inventory Can use average or ending inventory. Measures efficiency of asset usage. Differs by industry. Days