1460T_c09.qxd01:09:200609:04 AM Page450 EQA 450 Chapter 9 Inventories:Additional Valuation Issues ILLUSTRATION 9A-11 Conversion to LIFO December 31,2007,Inventory at LIFO Cost Retail Inventory Method Retail Ending inventory x Ratio LIFO $25,000 45%* =S11,250 "The cost-to-retail ratio was computed as follows: Net purchases at cost $47,250 Net purchases at retail plus $100,000+$7,000-$2,000 =45% markups less markdowns The difference of $500($11,250-$10,750)between the LIFO retail method and the conventional retail method in the ending inventory for 2007 is the amount by which the company must adjust beginning inventory for 2008.The entry to adjust the inven- tory to a cost basis is as follows. Inventory 500 Adjustment to Record Inventory at Cost 500 KEY TERMS SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 9A dollar-value LIFO retail method,446 8.Determine ending inventory by applying the LIFO retail methods.The application of LIFO retail method,445 LIFO retail is made under two assumptions:stable prices and fluctuating prices. Procedures under stable prices:(a)Because the LIFO method is a cost method,both markups and markdowns must be considered in obtaining the proper cost-to-retail per- centage.(b)Since the LIFO method is concerned only with the additional layer,or the amount that should be subtracted from the previous layer,the beginning inventory is excluded from the cost-to-retail percentage.(c)The markups and markdowns apply only to the goods purchased during the current period and not to the beginning inventory. Procedures under fluctuating prices:The steps are the same as for stable prices ex- cept that in computing the LIFO inventory under a dollar-value LIFO approach,the dollar increase in inventory is found and deflated to beginning-of-the-year prices.Do- ing so will determine whether actual increases or decreases in quantity have occurred. If quantities increase,this increase is priced at the new index to compute the new layer.If quantities decrease,the decrease is subtracted from the most recent layers to the extent necessary. Note:All asterisked Questions,Brief Exercises,Exercises,Problems,and Concepts for Analysis relate to material contained in the appendix to the chapter. QUESTIONS 1.Where there is evidence that the utility of inventory 5.In some instances accounting principles require a de- goods,as part of their disposal in the ordinary course of parture from valuing inventories at cost alone.Deter- business,will be less than cost,what is the proper ac- mine the proper unit inventory price in the following counting treatment? cases 2.Explain the rationale for the ceiling and floor in the lower-of-cost-or-market method of valuing inventories. Cases 3.Why are inventories valued at the lower-of-cost-or- 1 2 3 4 5 market?What are the arguments against the use of the Cost $15.90$16.10$15.90 $15.90$15.90 LCM method of valuing inventories? Net realizable value 14.30 19.20 15.20 10.40 16.40 Net realizable value 4.What approaches may be employed in applying the less normal profit 12.80 17.60 13.75 8.80 14.80 lower-of-cost-or-market procedure?Which approach is Market(replace- normally used and why? ment cost) 14.80 1720 12.80 9.70 16.801. Where there is evidence that the utility of inventory goods, as part of their disposal in the ordinary course of business, will be less than cost, what is the proper ac￾counting treatment? 2. Explain the rationale for the ceiling and floor in the lower-of-cost-or-market method of valuing inventories. 3. Why are inventories valued at the lower-of-cost-or￾market? What are the arguments against the use of the LCM method of valuing inventories? 4. What approaches may be employed in applying the lower-of-cost-or-market procedure? Which approach is normally used and why? 5. In some instances accounting principles require a de￾parture from valuing inventories at cost alone. Deter￾mine the proper unit inventory price in the following cases. Cases 12345 Cost $15.90 $16.10 $15.90 $15.90 $15.90 Net realizable value 14.30 19.20 15.20 10.40 16.40 Net realizable value less normal profit 12.80 17.60 13.75 8.80 14.80 Market (replace￾ment cost) 14.80 17.20 12.80 9.70 16.80 QUESTIONS The difference of $500 ($11,250 $10,750) between the LIFO retail method and the conventional retail method in the ending inventory for 2007 is the amount by which the company must adjust beginning inventory for 2008. The entry to adjust the inven￾tory to a cost basis is as follows. Inventory 500 Adjustment to Record Inventory at Cost 500 450 • Chapter 9 Inventories: Additional Valuation Issues ILLUSTRATION 9A-11 Conversion to LIFO Retail Inventory Method December 31, 2007, Inventory at LIFO Cost Ending inventory   *The cost-to-retail ratio was computed as follows:   45% markups less markdowns  $47,250 $100,000 $7,000 $2,000  Net purchases at cost Net purchases at retail plus  LIFO $11,250  Ratio 45%*  Retail $25,000 SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 9A 8. Determine ending inventory by applying the LIFO retail methods. The application of LIFO retail is made under two assumptions: stable prices and fluctuating prices. Procedures under stable prices: (a) Because the LIFO method is a cost method, both markups and markdowns must be considered in obtaining the proper cost-to-retail per￾centage. (b) Since the LIFO method is concerned only with the additional layer, or the amount that should be subtracted from the previous layer, the beginning inventory is excluded from the cost-to-retail percentage. (c) The markups and markdowns apply only to the goods purchased during the current period and not to the beginning inventory. Procedures under fluctuating prices: The steps are the same as for stable prices ex￾cept that in computing the LIFO inventory under a dollar-value LIFO approach, the dollar increase in inventory is found and deflated to beginning-of-the-year prices. Do￾ing so will determine whether actual increases or decreases in quantity have occurred. If quantities increase, this increase is priced at the new index to compute the new layer. If quantities decrease, the decrease is subtracted from the most recent layers to the extent necessary. Note: All asterisked Questions, Brief Exercises, Exercises, Problems, and Concepts for Analysis relate to material contained in the appendix to the chapter. KEY TERMS dollar-value LIFO retail method, 446 LIFO retail method, 445 1460T_c09.qxd 01:09:2006 09:04 AM Page 450