Inventory Loss Recovery and Gross Profit Method Quiz

A product financing arrangement usually involves a 'sale' with either an implicit or explicit 'buyback' agreement.

A seller should report inventory and related liability when a repurchase agreement exists at a set price that covers all costs of the inventory plus related holding costs.

The seller should recognize revenue from inventories sold that are not expected to be returned, a refund liability for estimated inventories to be returned, and an asset for the books estimated to be returned which reduces the cost of goods sold.

If the seller is unable to estimate the level of returns with reliability, it should not report any revenue until the returns become predictive.

Companies generally account for the acquisition of inventories on a cost basis, including costs directly connected with bringing the goods to the buyer’s place of business and converting them to a salable condition.

Including holding costs in the set price of a repurchase agreement ensures that the seller covers all costs of the inventory and related holding costs, leading to accurate reporting of inventory and liability on the seller's books.

Birr 270,000

When applying the LCNRV rule to major groups, higher net realizable values can offset the lower net realizable values, resulting in a higher total value.

Using the total-inventory approach totally offsets the high net realizable value for spinach.

The cost-of-goods-sold method debits cost of goods sold for the write-down of inventory to net realizable value, preventing a loss in the income statement.

Birr 415,000

The similar-or-related-items approach partially offsets the high net realizable value for spinach.

It provides an estimate, uses past percentages, applies a blanket gross profit rate which may not reflect actual rates, and may not be suitable for merchandise with varying rates of gross profit.

It would be extremely difficult to determine the cost of each sale, enter cost codes on the tickets, change codes to reflect merchandise value declines, and allocate costs such as transportation.

To verify the inventory values provided by estimation methods like the gross profit method and to comply with IFRS requirements for additional inventory verification.

By applying a blanket gross profit rate, usually based on past percentages, to the sales revenue.

To simplify inventory valuation in high-volume retail operations where specific identification of costs for each sale is impractical.

IFRS mandates a physical inventory to confirm the accuracy of inventory records and valuations.

When the net realizable value of inventories previously written down becomes greater than cost or there is clear evidence of an increase in the net realizable value.

The gross profit method is used when taking a physical inventory is impractical, such as in cases of fire or other catastrophes that destroy inventory or inventory records.

1. The beginning inventory plus purchases equal total goods to be accounted for. 2. Goods not sold must be on hand. 3. The sales, reduced to cost, deducted from the sum of the opening inventory plus purchases, equal ending inventory.

Companies can use the gross profit method when they experience a situation where taking physical inventory is not possible, such as after a fire or other disaster.

The main purpose of the gross profit method is to approximate the value of inventory on hand when physical inventory is impractical to take.

The reversal of a write-down occurs when the net realizable value of previously written-down inventories increases, allowing the write-down amount to be reversed up to the original write-down level.

Total goods available for sale at cost / Total goods available at retail price

By deducting the sales for the period from the retail value of the goods available for sale

Multiplying the cost-to-retail ratio by the ending inventory valued at retail

$40,000 + $126,000 = $166,000

$220,000 - $170,000 = $50,000

$0.7 * $50,000 = $35,000