Intermediate Accounting IFRS Chapter 9 Quiz

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Questions and Answers

What principle does a company abandon when the future utility of an asset drops below its original cost?

Realized gain reporting

Historical cost principle (correct)

Revaluation model

Lower-of-cost principle

How is Net Realizable Value (NRV) calculated?

Estimated selling price minus historical cost of inventory

Historical cost minus estimated completion costs

Estimated selling price less estimated costs to complete and selling costs (correct)

Estimated selling price plus estimated costs to complete

If Mander AG has inventory costs of €950 and reports a net realizable value of €750, what loss does it report on its income statement?

€200 (correct)

€150

€750

€950

In determining the final inventory value under LCNRV, what basis do most companies typically use?

Item-by-item basis Signup and view all the answers

Which of the following costs are factored in when computing Net Realizable Value?

Estimated costs to complete and estimated selling costs Signup and view all the answers

What is the main reason for using an allowance account when recording inventory adjustments to net realizable value?

To avoid directly affecting the Inventory account. Signup and view all the answers

In the event of a recovery of inventory loss, what is the limit for the reversal of the write-down?

The reversal is limited to the original amount of the write-down. Signup and view all the answers

Which of the following statements reflects a deficiency of the LCNRV rule?

Losses are recorded in the period of sale rather than when they occur. Signup and view all the answers

When using the loss method to adjust inventory to NRV, what is reflected on the income statement?

Both the write-down loss and allowance adjustment. Signup and view all the answers

What does the term 'individual-item approach' refer to in inventory valuation?

Assessing each item in the inventory for its individual NRV. Signup and view all the answers

Why is consistency important in applying inventory valuation methods across periods?

To provide comparability in financial results across different time frames. Signup and view all the answers

What is the purpose of the entry for 'Loss Due to Decline of Inventory to NRV'?

To document the decrease in inventory value. Signup and view all the answers

How does the adjustment to net realizable value (NRV) ultimately affect net income?

Inventory write-downs decrease net income. Signup and view all the answers

What is the role of the 'Allowance to Reduce Inventory to NRV' account when reporting inventory?

It represents potential losses from inventory write-downs. Signup and view all the answers

What effect do net realizable value adjustments have on the reporting of inventory in financial statements?

Inventory is reported at lower of cost or net realizable value. Signup and view all the answers

Study Notes

Intermediate Accounting - IFRS Edition, Chapter 9: Inventories

Chapter 9 focuses on Additional Valuation Issues regarding inventories
This chapter, prepared by Coby Harmon, University of California, Santa Barbara, and Westmont College, is part of the Fourth Edition of Kieso, Weygandt, Warfield's Intermediate Accounting (IFRS Edition)

Lower-of-Cost-or-Net Realizable Value (LCNRV)

LCNRV departs from historical cost when an asset's future utility is diminished
Net Realizable Value (NRV): Estimated selling price less completion costs and costs to make a sale.
Example calculation: Mander AG's unfinished inventory, costing €950, with a sales value of €1,000, completion cost of €50, and selling costs of €200 has an NRV of €750
Mander should report inventory on the financial statement at €750 instead of its cost
A loss on inventory write-down of €200 (€950 - €750) is reported in the income statement

Valuation Methods

Valuation Bases: These include net realizable value, relative standalone sales value, and purchase commitments
Gross Profit Method: Businesses often use the gross profit percentage to estimate the value of their inventory
Retail Inventory Method: The Retail Inventory Method involves calculating the cost of goods sold based on the relationship between selling prices and cost of merchandise

Other Key Concepts

LCNRV disclosures: These disclosures may be based on standard costs, determined using FIFO and reflect net realizable values adjusted for costs of realizing those values.
Method of applying LCNRV: usually an item-by-item basis (individual-item), and this approach is typically used to establish the lowest valuation for financial reporting purposes
Reporting NRV instead of cost: a company may use an allowance account to reduce inventory to its NRV. A loss due to decline in inventory value is recorded for the difference.
Income statement presentation: the presentation of inventory adjustments on the income statement, such as losses due to the decline in inventory, is detailed
Use of an allowance: an allowance account, titled Allowance to Reduce Inventory to NRV, is used instead of directly crediting the inventory account for inventory write-downs.
Recovery of inventory loss: When the net realizable value (NRV) of inventory increases, the amount of the original write-down is reversed. This reversal is limited to the initial write-down amount
Effect on net income: Inventory is adjusted to NRV in subsequent accounting periods.

Presentation and Analysis

Reporting Inventories: Financial reporting standards require specific disclosures about accounting policies, carrying amounts by category, fair value less costs to sell, and the amounts expensed during the period
Inventory Analysis: Common ratios, such as inventory turnover and average days to sell, are used to assess and strategize about inventory levels
Examples of Common Ratios: Illustrative calculations for these ratios are given, using data from companies like Tate & Lyle. Inventory turnover and average days to sell inventory are key indicators in inventory analysis

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Description

Test your knowledge on Chapter 9 of Intermediate Accounting (IFRS Edition), focusing on additional valuation issues related to inventories. This chapter covers crucial concepts such as net realizable value and loss on inventory write-downs. Dive into the specifics of valuation methods and how they apply in real-world scenarios.