FAR Chapter 8: Inventory Valuation Methods and Ratios

Vocabulary flashcards covering inventory valuation methods, including Lower-of-Cost-or-NRV, Lower-of-Cost-or-Market, purchase commitments, gross profit estimations, retail inventory methods, and related financial ratios.

Net Realizable Value (NRV)

selling price - the cost of completion, disposal, and transportation.

Lower-of-Cost-or-NRV (LCNRV)

An inventory valuation guideline where inventory is reported at the lower of original cost or NRV; if original cost is less than NRV, no entry is made, but if original cost is greater than NRV, an impairment journal entry is recorded.

Loss Method (Lower-of-Cost-or-NRV)

An impairment recording method that debits "Loss due to decline of inv" and credits "Inventory" for the amount of $\text{loss} = (\text{cost} - \text{NRV}) \times \text{units}$.

Purchase agreement loss entry

Debit unrealized holding gain or loss

Credit est liability on purchase commitment

Cost of Goods Sold Method (Lower-of-Cost-or-NRV)

An impairment recording method that debits "COGS" and credits "Inventory" directly for the amount of $\text{loss} = (\text{cost} - \text{NRV}) \times \text{units}$.

Loss amount

(Cost-NRV) units

Lower-of-Cost-or-Market (LCM)

An inventory valuation method available only when using LIFO or retail inventory; it compares original cost against market value, which is determined by evaluating NRV, NRV minus normal profit margin, and replacement cost.

Valuation Using Relative Sales columns

Lot type - #lots(sale $) - / total - (lump sum purchase $) - / # lots

Purchase Commitments

Contracts where, if the market price drops below the contract price and a loss is expected, the buyer records the loss in the period of decline

Purchase commitment entry

Debit unrealized holding G/L - income

Credit est Lia Lilith on purchase commitments

Gross Profit Inventory Method

A non-GAAP technique used to estimate ending inventory quickly and informally using the relationships between sales revenue, gross profit, and cost of goods sold.

Retail Inventory Method

A method allowing retailers to determine ending inventory at cost without performing a physical count

Cost to retail %

Cost $/ retail $

EI at cost

EI at retail * cost to retail %

Conventional Retail Method

An application of the retail inventory method that includes markups in the calculation of the cost-to-retail percentage but excludes markdowns from the ratio.

Cost Method (Retail Inventory)

An application of the retail inventory method that includes both markups and markdowns in the calculation of the cost-to-retail percentage.

Freight in

Only under cost section

LIFO Retail Method

A retail inventory method that excludes beginning inventory from the cost-to-retail percentage calculation and tracks inventory additions as separate layers.

Inventory Turnover Ratio

$\frac{\text{COGS}}{\text{average inventory}}$.

Average Days to Sell Inventory

$\frac{365}{\text{inventory turnover ratio}}$.