Ch. 8 Valuation of Inventories A Cost - Basis Approach Codification Exercises

CODIFICATION EXERCISES CE8-1 (a) Inventory is the aggregate of those items of tangible personal property that have any of the following characteristics: a. Held for sale in the ordinary of business. b. To process of production for such sale. c. To be currently consumed in the production of goods or services to be available for sale. The term inventory embraces goods awaiting sale (the merchandise of a trading concern and the finished goods of a manufacturer), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials and supplies). This definition of inventories excludes long-term assets subject to depreciation accounting, or goods which, when put into use, will be so classified. The fact that a depreciable asset is retired from regular use and held for sale does not indicate that the item should be classified as part of the inventory. Raw materials and supplies purchased for production may be used or consumed for the construction of long-term assets or other purposes not related to production, but the fact that inventory items representing a small portion of the total may not be absorbed ultimately in the production process does not require separate classification. By trade practice, operating materials and supplies of certain types of entities such as oil producers are usually treated as inventory. (b) A customer is a reseller or a consumer, either an individual or a business that purchases a vendor’s products or services for end use rather than for resale. This definition is consistent with paragraph 280-10-50-42, which states that a group of entities known to a reporting entity to be under common control shall be considered as a single customer, and the federal government, a state government, a local government (for example, a country or municipality), or a foreign government each shall be considered as a single customer. (c) Customer includes any purchaser of the vendor’s products at any point along the distribution chain, regardless of whether the purchaser acquires the vendor’s products directly or indirectly (for example, from a distributor) from the vendor. For example, a vendor may sell its products to a distributor who in turn resells the products to a retailer. In that example, the retailer—not the distributor—is a customer of the vendor. (d) A product financing arrangement is a transaction in which an entity sells and agrees to repurchase inventory with the repurchase price equal to the original sale price plus carrying and financing costs, or other similar transactions. LO: 1, Bloom: K, Difficulty: Simple, Time: 10-15, AACSB: Communication, Technology Reporting, Research, Technology, AICPA PC: Communication CE8-2 According FASB ASC 605-45-45-19 through 21 [Shipping and Handling Fees and Costs]: 45-19 Many sellers charge customers for shipping and handling in amounts in amounts that exceed the related costs incurred. The components of shipping and handling costs, and the determination of the amounts billed to customers for shipping and handling, may differ from entity to entity. Some entities define shipping costs and handling costs as only those costs incurred for a third-party shipper to transport products to the customer. Other entities include as shipping and handling costs a portion of internal costs, for example, salaries and overhead related to the activities to prepare goods for shipment. In addition, some entities charge customers only for amounts that are a direct reimbursement for shipping and, if discernible, direct incremental handling costs; however, many other entities charge customers for shipping and handling in amounts that are not a direct pass-through of costs. 8-78 CE8-2 (Continued) 45-20 For those entities that determine under the indicators listed in paragraphs 605-45-45-4 through 45-18 that shipping and handling fees shall be reported gross, all amounts billed to a customer in a sale transaction related to shipping and handling represent revenues earned for the goods provided and shall be classified as revenue. 45-21 Also, shipping and handling costs shall not be deducted from revenues (that is, netted against shipping and handling revenues). LO: 2, Bloom: K, Difficulty: Simple, Time: 7-10, AACSB: Communication, Technology Reporting, Research, Technology, AICPA PC: Communication CE8-3 FASB ASC 330-10-35-1 and 15 with respect to adjustments to Lower of Cost or Market: 35-1 A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market. With respect to Stating Inventories Above Cost: 35-15 Only in exceptional cases may inventories properly be stated above cost. For example, precious metals having a fixed monetary value with no substantial cost of marketing may be stated at such monetary value; any other exceptions must be justifiable by inability to determine appropriate approximate costs, immediate marketability at quoted market price, and the characteristic of unit interchangeability. LO: 2, Bloom: K, Difficulty: Simple, Time: 7-10, AACSB: Communication, Technology Reporting, Research, Technology, AICPA PC: Communication CE8-4 FASB ASC 330-10-S99-3 (SAB Topic 11.F, LIFO Liquidations) The following is the text of SAB Topic 11.F, LIFO Liquidations. Facts: Registrant on LIFO basis of accounting liquidates a substantial portion of its LIFO inventory and as a result includes a material amount of income in its income statement which would not have been recorded had the inventory liquidation not taken place. Question: Is disclosure required of the amount of income realized as a result of the inventory liquidation? Interpretive Response: Yes. Such disclosure would be required in order to make the financial statements not misleading. Disclosure may be made either in a footnote or parenthetically on the face of the income statement. LO: 5, Bloom: K, Difficulty: Simple, Time: 7-10, AACSB: Communication, Technology Reporting, Research, Technology, AICPA PC: Communication 8-79