• P167 E4-2 Product 1 NRV 34 Cost 20 LCM 20
2
3 •
80
60
90

80
50
Only the Product 2 is impaired.
Adjusting Cost to Market
• When a company uses the LCM method to value inventories (if inventory value<cost), a write-down (减值) of inventory is required.
Applying LCM method
• The LCM method can be applied to individual inventory items, logical inventory categories, or the entire inventory.
• 市价与成本孰低法可以应用于个别存货项目、存货组合或 者整体存货。 Usually: use LCM method on individual inventory item 通常对单个存货项目计提减值 Under certain circumstances: use LCM method on logical inventory categories or the entire inventory 在某些特殊情况下，对存货组合或整体存 货计提减值
Total
415,000
347,000
Adjusting Cost to Market
• • • Write-down of inventory =415,000-347,000=68,000 Dr. Loss on write-down of inventory 68,000 Cr. Inventory valuation allowance 68,000
150,000
80,000 90,000 95,000 265,000 415,000
155,000
65,000 56,000 86,000 207,000
150,000
207,000 357,000
Adjusting Cost to Market
• • • Write-down of inventory =415,000-357,000=58,000 Dr. Loss on write-down of inventory 58,000 Cr. Inventory valuation allowance 58,000
Applying LCM method
•
1.
Compare three applications:
Apply LCM to individual inventory item, ▪ Inventory value=$347,000 2. Apply LCM to logical inventory categories, ▪ Inventory value=$357,000 3. Apply LCM to the entire inventory, ▪ Inventory value=$362,000 Applying LCM to groups of inventory items will usually cause a higher inventory valuation than if applied on an item-by-item basis. 用“市价与成本 孰低法”对存货组合(或整体存货)计算出的存货价值会高 于对单个存货计算出的存货价值。
Chapter 4
Inventories: Additional Issues
Impairment of Inventories
• Impairment of inventories (存货的减值): the cost of inventories may not be recoverable.
▪ The value of the inventories drop below their historical cost. ▪ Inventory value<cost
1. Apply LCM method to individual inventory item. Cost 50,000 100,000 80,000 90,000 95,000 NRV 65,000 90,000 65,000 56,000 86,000 Inventory value 50,000 90,000 65,000 56,000 86,000 A B C D E Item
Exercise
• P167 E4-2
– – (1) Calculate the NRV for each product. (2) Determine the inventory’s value for each product by applying the LCM method.
Exercise
•
▪
What is the “market value”?
“Market value” refers to the “Net realizable value (NRV)” of inventories.
•
How to calculate the “NRV”?
① Inventories held for sale 持有以备出售的存货 Such as finished goods (also called merchandising inventory) NRV=estimated selling price – disposal costs 可变现净值=估计售价–处置成本(销售费用及相关 税费)
Applying LCM method
3. Apply LCM method to the entire inventory. Item A B Cost 50,000 100,000 NRV 65,000 90,000 Inventory value
C
D E Total
80,000
90,000 95,000 415,000
Impairment of Inventories
• How do we know we have an impairment of inventories? 如何判断存货存在减值迹象？ • Impairment is incurred:
▪ If those inventories are damaged 被损坏 ▪ If inventories have become wholly or partially obsolete 部分或全部过时 ▪ If their selling prices have declined 市价下跌 ▪ If the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. 估计的完工成本或估计的销售费用上 涨
Applying LCM method
2. Apply LCM method to logical inventory categories. Item A B Cost 50,000 100,000 NRV 65,000 90,000 Inventory value
A+B (Ⅰ)
C D E C+D+E (Ⅱ) Total
▪ “Cost of ending inventory” is calculated by specific identification, average cost, FIFO, LIFO method which were discussed in Chapter 3
How to use LCM method
65,000
56,000 86,000 362,000 362,000
Adjusting Cost to Market
• • • Write-down of inventory =415,000-362,000=53,000 Dr. Loss on write-down of inventory 53,000 Cr. Inventory valuation allowance 53,000
Inventory category Ⅰ Item A Item B Inventory category Ⅱ Item C Item D Item E
Applying LCM method
• Use LCM to determine the inventory value. Three applications:
Impairment of Inventories
• When the impairment of inventories has incurred, we use LCM method to measure the inventories.
▪ LCM method: lower-of-cost-or-market method (成本与市价孰低法) ▪ Compare cost with current market value Market value<Cost Inventory value=MV Impairment is incurred. Cost<Market value Inventory value=cost
90,000
65,000 56,000 86,000
Applying LCM method
• Items A-B and items C-E are two collections of similar items that can be considered as two logical inventory categories.