Chapter 8

Net realizable value

Estimated selling price less cost of completion, disposal, and transportation.

Lower of cost or market

Inventories valued at the lower of cost or market, comparing market value with cost.

Market value components

Includes replacement cost, ceiling (net realizable value), and floor (net realizable value minus normal profit margin).

GAAP conditions for net realizable value

Net realizable value is permitted if 1) there is a controlled market with quoted prices, 2) no significant cost of disposal, 3) investors available for immediate delivery.

Relative sale value

Used to calculate inventory cost based on sales prices.

Gross profit method steps: 1) Calculate COG available for sale

Calculate beginning inventory plus purchases.

Gross profit method steps: 2) Calculate COGS

Calculate sales minus gross profit.

Gross profit method steps: 3) Calculate ending inventories

Determine COGS from COG available for sale.

Purchase commitment

Arrangement to purchase inventory in advance where sellers retain ownership, and losses recognized when market prices decline.

Retail Inventory Method

Calculates the ratio of cost to retail price to estimate net income and control inventory shortages.

Special Items Relating to Retail Method

Includes freight out, purchase returns, purchase discounts, transfer in, normal and abnormal shortages, and employee discounts.

Inventory turnover ratio

Measures the frequency a company sells its inventory on average.

Average days to sell inventory

Represents the average number of days a company has inventory on hand.