*** Adult Truths *** - An Email ForwardSlide 2LCM ApproachDiscussion QuestionDetermining Market ValueExample 1: LCMExample 1: ContinuedExample 1: ContinuedExample 1: ContinuedExample 1: LCMExample 1: ContinuedExample 1: ContinuedExample 1: ContinuedExample 1: ContinuedExample 1: ContinuedApplying Lower of Cost or MarketExample 2: LCM applicationsExample 2: ContinuedEvaluation of LCM RuleValuation at Net Realizable ValuePurchase CommitmentsPurchase CommitmentsPurchase CommitmentsPurchase CommitmentsPurchase CommitmentsInventory Estimation TechniquesGross Profit MethodExample 3: Gross Profit MethodExample 3: ContinuedEvaluation of Gross Profit MethodRetail Inventory MethodRetail Inventory MethodThe Retail Inventory MethodLCM PracticeLCM PracticeLCM PracticeLCM PracticeLCM Practice*** Adult Truths *** - An Email Forward19.How many times is it appropriate to say "What?" before you just nod and smile because you still didn't hear or understand a word they said?20.I love the sense of camaraderie when an entire line of cars team up to prevent a jerk from cutting in at the front.21.Shirts get dirty. Underwear gets dirty. Pants? Pants never get dirty, and you can wear them forever…22.Sometimes I'll look down at my watch 3 consecutive times and still not know what time it is.23.Even under ideal conditions people have trouble locating their car keys in a pocket, finding their cell phone, and Pinning the Tail on the Donkey – but I'd bet everyone can find and push the snooze button from 3 feet away, in about 1.7 seconds, eyes closed, first time, every time.24.People who forward e-mail without deleting the tons of previous recipients should be shot and then tarred and feathered.CHAPTER 9 INVENTORIES:ADDITIONAL VALUATION ISSUESSommers – ACCT 3311LCM ApproachLower-of-cost-or-market approach to valuing inventoryGAAP generally require the use of historical cost to value assets, but a departure from cost is necessary when the utility of an asset is no longer as great as its cost. The utility or benefits from inventory result from the ultimate sale of the goods. This utility could be reduced below cost due to deterioration, obsolescence, or changes in price levels. To avoid reporting inventory at an amount greater than the benefits it can provide, the lower-of-cost-or-market approach to valuing inventory was developed. This approach results in the recognition of losses when the value of inventory declines below its cost, rather than in the period in which the goods are ultimately sold.Discussion QuestionQ9-2 Explain the rationale for the ceiling and floor in the lower-of-cost-or-market method of valuing inventories.The upper (ceiling) and lower (floor) limits for the value of the inventory are intended to prevent the inventory from being reported at an amount in excess of the net realizable value or at an amount less than the net realizable value less a normal profit margin. The maximum limitation, not to exceed the net realizable value (ceiling) covers obsolete, damaged, or shopworn material and prevents overstatement of inventories and understatement of the loss in the current period. The minimum limitation deters understatement of inventory and overstatement of the loss in the current period.Determining Market ValueCeilingNRVCeilingNRVReplacementCostReplacementCostNRV – NPFloorNRV – NPFloorDesignatedMarketDesignatedMarketCostCostNot More ThanNot Less ThanOrStep 1Determine Designated MarketStep 2Compare Designated Market with CostLower of CostOr MarketLower of CostOr MarketExample 1: LCMTatum Company has four products in its inventory. Information about the Dec 31, 2011, inventory is as follows:The normal gross profit percentage is 25% of cost.Determine the balance sheet inventory carrying value at Dec 31, 2011, assuming the LCM rule is applied to individual products.ProductTotal CostTotalReplacementCostTotal NetRealizableValue101 $ 120,000 $ 110,000 $ 100,000102 90,000 85,000 110,000103 60,000 40,000 50,000104 30,000 28,000 50,000Example 1: ContinuedProduct RCCeiling NRVFloor NRV-NP101 $110,000$100,000 $70,000Example 1: ContinuedProduct RCCeiling NRVFloor NRV-NPDesignated Market Cost101 $110,000$100,000 $70,000 $100,000 $120,000Example 1: ContinuedProduct RCCeiling NRVFloor NRV-NPDesignated Market CostInventory Value101 $110,000$100,000 $70,000 $100,000 $120,000 $100,000Example 1: LCMTatum Company has four products in its inventory. Information about the Dec 31, 2011, inventory is as follows:The normal gross profit percentage is 25% of cost.Determine the balance sheet inventory carrying value at Dec 31, 2011, assuming the LCM rule is applied to individual products.ProductTotal CostTotalReplacementCostTotal NetRealizableValue101 $ 120,000 $ 110,000 $ 100,000102 90,000 85,000 110,000103 60,000 40,000 50,000104 30,000 28,000 50,000Example 1: ContinuedProduct RCCeiling NRVFloor NRV-NPDesignated Market CostInventory Value101 $110,000$100,000 $70,000 $100,000 $120,000 $100,000102 85,000 110,000 87,500Example 1: ContinuedProduct RCCeiling NRVFloor NRV-NPDesignated Market CostInventory Value101 $110,000$100,000 $70,000 $100,000 $120,000 $100,000102 85,000 110,000 87,500 87,500 90,000 87,500Example 1: ContinuedProduct RCCeiling NRVFloor NRV-NPDesignated Market CostInventory Value101 $110,000$100,000 $70,000 $100,000 $120,000 $100,000102 85,000 110,000 87,500 87,500 90,000 87,500103 40,000 50,000 35,000 40,000 60,000 40,000Example 1: ContinuedProduct RCCeiling NRVFloor NRV-NPDesignated Market CostInventory Value101 $110,000$100,000 $70,000 $100,000 $120,000 $100,000102 85,000 110,000 87,500 87,500 90,000 87,500103 40,000 50,000 35,000 40,000 60,000 40,000104 28,000 50,000 42,500 42,500 30,000 30,000Example 1: ContinuedProduct RCCeiling NRVFloor NRV-NPDesignated Market CostInventory Value101 $110,000$100,000 $70,000 $100,000 $120,000 $100,000102 85,000 110,000 87,500 87,500 90,000 87,500103 40,000 50,000 35,000 40,000 60,000 40,000104 28,000 50,000 42,500 42,500 30,000 30,000 Totals $300,000 $257,500Applying Lower of Cost or MarketLower of cost or market can be applied 3 different ways. 1. Apply LCM to each individual item in inventory.2. Apply LCM to each class of inventory.3. Apply LCM to the entire inventory as a group.Example 2: LCM applicationsAlmaden Hardware Store sells two distinct types of products, tools and paint products. Information pertaining to its 2011 year-end inventory is as follows:Determine balance sheet inventory carrying value at year-end,