Chapter 9: Q8Q (page 442)
Question:What factors might call for inventory valuation at sales prices (net realizable value or market price)?
Answer
The factors include are as follows:
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Steele Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Steele uses the lower-of-average-cost-or-net realizable value (LCNRV) rule for these raw materials. The net realizable value of the raw materials is below the original cost. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period. Instructions (a) (1) At which amount should Steele’s raw materials inventory be reported on the balance sheet? Why? (2) In general, why is the LCNRV rule used to report inventory? (b) What would have been the effect on ending inventory and cost of goods sold had Steele used the LIFO inventory method instead of the average-cost inventory method for the raw materials? Why?
Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1993, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox’s fiscal year, November 30, 2017, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods \(647,000 Work in process 112,500 Raw materials 264,000 Factory supplies 69,000 The following information relates to Maddox’s inventory and operations. 1. The finished goods inventory consists of the items analyzed below. Cost NRV Down tube shifter Standard model \) 67,500 \( 67,000 Click adjustment model 94,500 89,000 Deluxe model 108,000 110,000 Total down tube shifters 270,000 266,000 Bar end shifter Standard model 83,000 90,050 Click adjustment model 99,000 97,550 Total bar end shifters 182,000 187,600 Head tube shifter Standard model 78,000 77,650 Click adjustment model 117,000 119,300 Total head tube shifters 195,000 196,950 Total fi nished goods \)647,000 \(650,550 2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. 3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan. 4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20% above the current market price. The NRV of the rest of the raw materials is \)127,400. 5. The total NRV of the work in process inventory is \(108,700. 6. Included in the cost of factory supplies are obsolete items with an historical cost of \)4,200. The market value of the remaining factory supplies is $65,900. 7. Maddox applies the LCNRV method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Maddox applies the LCNRV method to the total of each inventory account. 8. Consider all amounts presented above to be material in relation to Maddox’s financial statements taken as a whole. Instructions (a) Prepare the inventory section of Maddox’s balance sheet as of November 30, 2017, including any required note(s). (b) Without prejudice to your answer to (a), assume that the NRV of Maddox’s inventories is less than cost. Explain how this decline would be presented in Maddox’s income statement for the fiscal year ended November 30, 2017. (c) Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2017, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2017. Discuss the impact, if any, that this purchase commitment would have on Maddox’s financial statements prepared for the fiscal year ended November 30, 2017.
Briefly describe the valuation of (a) biological assets and (b) agricultural produce
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
All of the following are key similarities between GAAP and IFRS with respect to accounting for inventories except: (a) costs to include in inventories are similar. (b) LIFO cost flow assumption where appropriate is used by both sets of standards. (c) fair value valuation of inventories is prohibited by both sets of standards. (d) guidelines on ownership of goods are similar
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