CH 8 and 9 Flashcards
What is meant by “LIFO liquidation problem”?
Since inventory left using LIFO is oldest items – if prices are rising, the ending inventory will be low. If we liquidate our inventory at current sales prices (high) with a very low CGS (value of the old inventory available for sale), we will have an inflated profit with a large tax bill.
- What is the purpose of “Dollar-value LIFO?”
To neutralize the effects of inflation since we convert ending inventory to base year dollars in order to see what the increase/decrease in inventory is during the current period. Then the increase/decrease is converted back from base year dollars to current dollars if increase or prior year dollars if decrease.
- In Dollar-value LIFO, how do we convert the “inflated” value of inventory at year-end to base-year value?
Divide ending inventory at current year prices by the price index for that year (e.g. 1.05 – usually given)
- How do we convert the Dollar-value LIFO layer (increase or decrease in inventory value for the year) back to current-year price levels?
Multiply the dollar value LIFO layer expressed in base year dollars by the current year price index.
- If inventory at current year prices is $500,000 and dollar-value LIFO inventory is $475,000, what is the adjusting entry needed if the Allowance to convert to Dollar Value LIFO has a credit balance of $10,000?
( DR) CGS $15,000
(CR) Allowance to convert to Dollar-Value LIFO $15,000
Since $25,000 credit is the desired Allowance balance and the beginning balance in the account is $10,000 credit, we need an additional credit to Allowance to bring it to an ending credit balance of $25,000.
- What is meant by LCM?
Lower of cost or market – we compare the original cost of inventory to the market value and use the lower of the two – conservatism – so as not to overstate value of the inventory.
- How do we determine the apparent market value?
Look at Net Realizable value, Net realizable value minus reasonable profit and replacement value and pick the middle value.
- Describe the Gross Profit Method for estimating ending inventory.
Calculate total cost of goods available for sale
Calculate GP by multiplying net sales revenue by GP%
Subtract GP from net sales revenue to determine CGS.
Subtract CGS from total cost of goods available to determine ending inventory.
- How is the cost-retail conversion ratio calculated?
Calculate total cost of goods available for sale at both cost and retail dollars. Divide total available at cost into total available at retail . Apply that ratio to the ending inventory at retail to covert it back to cost.
- How are mark-ups and mark-downs treated in the conventional retail inventory method?
Mark-ups are added to cost of goods available (retail) and considered as part of the calculation to determine the Cost to retail ratio.
Markdowns are used in the calculation to determine ending inventory at retail but not considered in the calculation of the conversion ratio.
In the retail method, markdowns as well as markups are used in determining total cost of goods available at retail and are part of the conversion ratio.
