Lower of Cost or Market (Intermediate Accounting) - YouTube

Bennet Tchaikovsky: Hi this is Bennet Tchaikovsky and welcome to inventory lower cost or market. This is a video that is geared for those of you that are taking intermediate accounting

Bennet Tchaikovsky: So my disclaimer and copyright notice the information and opinions in this presentation are those of the author only and not the authors employers.

Bennet Tchaikovsky: Or affiliated organizations, including but not limited to Irvine Valley College, the South. Orange County Community College District or Chapman University.

Bennet Tchaikovsky: The presentation is for educational purposes only and does not constitute any legal or accounting advice whatsoever.

Bennet Tchaikovsky: The presentation is copyright 2008 to 2019 by Bennet Tchaikovsky. I encourage you to share this presentation.

Bennet Tchaikovsky: And share a link to this presentation on an on modified basis if you modify the presentation in any way please email me. Prior to doing so at [email protected] to discuss

Bennet Tchaikovsky: Know the author does not claim any copyright whatsoever in any companies or organizations mentioned in this presentation.

Bennet Tchaikovsky: Rather, the other parties are the owners of their respective copyrights. Okay.

Bennet Tchaikovsky: So for intermediate accounting what comes over here from the accounting coach and I'll kind of put this over here in the video description.

Bennet Tchaikovsky: Is that when we're determining market right when we say lower of cost or market. Well, that's really going through and referring to

Bennet Tchaikovsky: Is okay what is market. It's going to be the middle of these three values. It's going to be replacement costs.

Bennet Tchaikovsky: Net Realizable Value or net realizable value minus a normal profit margin.

Bennet Tchaikovsky: What exactly is net realizable value. OK, so the net realizable value the selling price of the inventory less than a kind of cost to sell completion or dispose

Bennet Tchaikovsky: And normal profit margin is what the profit margin, the company expects to sell in terms of doing its inventory now.

Bennet Tchaikovsky: When you see this in terms of they'll say, oh, this is the ceiling and this is the floor. Yeah, okay. If you look at if you treat this if you try if you compute the three values and figure out the middle

Bennet Tchaikovsky: That's going to be your market, you know, kind of satisfy all those things because no matter what.

Bennet Tchaikovsky: This replacement cost is going to be falling in between one of those areas right over here. So that's going to be helping you going through determine

Bennet Tchaikovsky: What exactly is your market. So what I've done here is I've modified the question that we went through and did for the other video. So the concepts are really the same between how I would teach us and financial

Bennet Tchaikovsky: Versus intermediate with the sole exception of being how we compute market. So in a basic financial accounting class I will be giving you market.

Bennet Tchaikovsky: Over here, I'm basically having you compute the market value. So let's go through and do that. So here I've given some additional information. So let's go over here to our Google Sheets.

Bennet Tchaikovsky: I'm going to pause, real quick, but I pulled that up. The other thing I've changed on this video is that my total cost of goods sold. I've changed that to 50 million

Bennet Tchaikovsky: Just so the differences will be a little bit more apparent when we're trying to go through and determine what exactly are

What our adjustment is going to be

Bennet Tchaikovsky: Okay, so before we go through and determine what exactly is our market. We've got a little bit of a different thing here, the market value is going to be the middle of three different values, which is going to be

Bennet Tchaikovsky: We'll call this over here and move this around a little bit.

Bennet Tchaikovsky: So what I'm trying to figure out here. Hold on.

Bennet Tchaikovsky: Okay so great. Are we going to make an appearance today. Do you want to do want to kind of her. There we go. So we've got a cat attack right now we've got a we've got a cat and who wants to be a YouTube star. I'm going to go shoot like a little bit of video right here.

Bennet Tchaikovsky: So, hello there. This is my cat looking for. There we go. We've officially gone for the cat to make that this more even more exciting cat is showing me my belly am purring, which according the most YouTube

Bennet Tchaikovsky: Videos, which means I'm actually in pretty good shape. So we're going to go ahead and pause that

Bennet Tchaikovsky: Okay, so what we need to figure out is market.

Bennet Tchaikovsky: Okay, and before it was given to us. This is going to be a little bit different. So when I'm determining market value. It's going to be the middle of the replacement cost then over here. What this is going to be so its replacement cost.

Bennet Tchaikovsky: And then we're going to have per unit

Bennet Tchaikovsky: Net Realizable Value.

Bennet Tchaikovsky: And then per unit

Bennet Tchaikovsky: This is going to be net realizable value.

Bennet Tchaikovsky: Minus a normal profit.

Bennet Tchaikovsky: Okay, so how do we figure out the Net Realizable Value okay if I called us

Bennet Tchaikovsky: Right over here. So my per unit Net Realizable Value is gonna be my selling price minus my per unit completion cost. So right over here, this over here is 30 minus five or 25. This here is 34 minus

Bennet Tchaikovsky: three or 31 I've got 32 minus two or 30 35 minus four 4 or 31 15 minus six or nine and then 40 minus one, or 39

Bennet Tchaikovsky: Again. Why am I going through and doing this. The reason is, is that I need to determine the lower cost or market.

Bennet Tchaikovsky: So even before I can figure out if my inventory is at the lower of cost or market. I need to figure out what exactly is my market value. Basically, what is market.

Bennet Tchaikovsky: So what I'm going to do is I'm comparing this right over here. I'm trying to figure out what is the middle value.

Bennet Tchaikovsky: So the first one for market is replacement cost. The second one here is net realizable value. Now the third one is going to be the Net Realizable Value which I just computed

Bennet Tchaikovsky: Minus the normal profit margin. So over here, I'm going to take this net realizable value or this 25 minus the 10

Bennet Tchaikovsky: Or $15 okay over here. This is going to be 31 minus the eight. And over here, this is going to be the 30 minus six over here. This is going to be the 31 minus the seven over here. This is going to be nine less the three

Bennet Tchaikovsky: And then over here, this is going to be 39 minus 15 okay so generally the replacement cost and then the per unit selling price per unit completion cost per unit profit margin.

Bennet Tchaikovsky: These will be given to you. However, for this kind of question you're going to need to figure out

Bennet Tchaikovsky: What is this per unit net realizable value and then what is the net realizable value minus a normal profit margin.

Bennet Tchaikovsky: So now what I'm going to do is I'm going to focus on these three areas right here. Okay, so I'm focusing on these three right here. And what I'm trying to say is, what is the middle value. Okay, so here the middle value is going to be replaced my costs.

Bennet Tchaikovsky: Right here.

Bennet Tchaikovsky: Okay here my middle value is going to be 31

Bennet Tchaikovsky: Here my middle value of 23 30 and 24 will be 24 here my middle of value of

Bennet Tchaikovsky: Will be 25 here my middle value. My middle value is going to be 30

Bennet Tchaikovsky: Now know one of the things we saw was that they always say, okay, it can your market can never be higher than the net realizable value.

Bennet Tchaikovsky: Also your market can never be lower than the normal profit margin. So as we see this right over here.

Bennet Tchaikovsky: Like in this here. Well, yeah, we're, we're doing NRV and that means we're keeping in line with that statement.

Bennet Tchaikovsky: Over here, lowest I can go as a net realizable value minus a normal profit margin. And then over here, you know, again, we're over here at net realizable value so

Bennet Tchaikovsky: That's how we're coming over to market. So now that we have this here. OK, now what I'm doing is I'm going to pull over each one of these items that I went through and did over here.

Bennet Tchaikovsky: So this is my cost and this is my market, and now I'm ready to go through and do my analysis. So again, the way I'm going to go through and do this is I'm picking over here.

Bennet Tchaikovsky: The middle values and that is going through and then determining my market so right over here. All of these items here that's 24. This again is going to be the middle value.

Bennet Tchaikovsky: And over here, this 25 will be the middle value over here. There's nine is the middle value of these three items. And then lastly we have this. I wish I had a mobile camera to show a cat eating a pencil and then last right over here we've got market being that replacement cost. Okay, so

Bennet Tchaikovsky: We're going to go. Now I'm just going to pause this real quick.

Bennet Tchaikovsky: Okay, so now what we have to kind of go through and do is here is inventory

Bennet Tchaikovsky: Lower costs. Okay. And if it is base area, we should say

Bennet Tchaikovsky: the market. Okay. So this first one right here.

Bennet Tchaikovsky: Is the answer is yes. Therefore, we need an adjustment.

Bennet Tchaikovsky: Okay, over here. Nope, no adjustment.

Bennet Tchaikovsky: Needed

Bennet Tchaikovsky: Here I am going to need an adjustment over here. I'm also going to be needing an adjustment because over here, my cost is a low

Bennet Tchaikovsky: Oh no, over here, I'm fine, because my cost. My market as above, cost, so I do not need an adjustment for that. Sorry about that again.

Bennet Tchaikovsky: I'm trying to show inventory is my inventory being shown at the lower of cost or market. So here, for the shores.

Bennet Tchaikovsky: Basically my per unit cost is the team and my market is 25 so I don't need an adjustment over here, I will need an adjustment because my market is below cost.

Bennet Tchaikovsky: And then lastly, I will also need an adjustment here because my market is also have a low cost. So the next thing I'm going to go through and do for this one right here is running of ourselves a little bit more room song basically going here.

Bennet Tchaikovsky: My adjustment.

Bennet Tchaikovsky: It's going to be

Bennet Tchaikovsky: Okay, so right over here, this is going to be my cost minus the market over here. I'm gonna have an adjustment of $1

Bennet Tchaikovsky: This is not applicable because my cost is below market. I'm fine here 28 minus 24 is going to be $4 here is not applicable don't need an adjustment.

Bennet Tchaikovsky: And then over here I will need an adjustment of roughly $8 and then last me here. It just $2. So how do I figure out the actual total amount of the adjustment so right here. If I call my quantity or DDD right here. I've got the DDD my time CCC so what I'm going to get here is 5000

Bennet Tchaikovsky: Times one or $5,000 other than 120000 and 120000 24000 my total amount of my adjustment is 269000

Bennet Tchaikovsky: So again, where is the difference. And I really want to encourage you to watch that previous video.

Bennet Tchaikovsky: Just because, again, the only difference in intermediate accounting is how are coming up with market. OK.

Bennet Tchaikovsky: So my adjustment here is 269000 so I know that my inventory is overstated by that amount.

Bennet Tchaikovsky: So now there's two different ways I can go through and do this. Now when it comes to doing the adjustment in terms of the inventory what it's going to depend upon is what is the materiality over here. My adjustment.

Bennet Tchaikovsky: In terms of total cost of goods sold. So here in this first example, and this is letters A, B,

Bennet Tchaikovsky: And C my total cost of goods sold is $50 million

Bennet Tchaikovsky: So over here, 50 million in one more zero

Bennet Tchaikovsky: So 50 million in terms of this being a percentage. When I take 269 divided by 50 million. I'm going to get less than a half a percent.

Bennet Tchaikovsky: Right, or roughly about 0.54% this amount is immaterial, meaning that if I was an investor. It really wouldn't make a difference to me. Okay. However, over here.

Bennet Tchaikovsky: So what I'm going to do when it comes to doing the journal entry is I'm going to make a debit over here to cost of goods sold. And again, I can do this because the amount is small relative to the cost of goods sold.

Bennet Tchaikovsky: And over here, I'm going to be crediting and I have a couple different options here. I can do inventory

Bennet Tchaikovsky: Or allowance.

Bennet Tchaikovsky: To reduce inventory to market.

Bennet Tchaikovsky: This will be adjust inventory to the lower cost of market.

Bennet Tchaikovsky: Okay. And so right over here.

Bennet Tchaikovsky: So that's what I'm going through. I'm doing. So that's number eight. This is like letter A right here. But now when it comes to be. This is a little, little bit this a little bit different situation.

Bennet Tchaikovsky: What if cost of goods sold is $500,000 so my adjustment now still at 269 but over here, my cost of goods sold is 500,000

Bennet Tchaikovsky: So as a percentage. This is significantly higher than what we are at before. So if I put this to cost of goods sold.

Bennet Tchaikovsky: I would be misleading. My investors, because if I'm showing us as cost of goods sold. This isn't cost of goods sold. This is, I bought too much stuff.

Bennet Tchaikovsky: And or I didn't manage my inventory. Well, and the values dropped so that's not cost of goods sold. That's bad management. So right over here. So instead what I'm going to do is I'm over here, this is the last two to inventory obsolescence.

Bennet Tchaikovsky: Same amount. It's just different accounts.

Bennet Tchaikovsky: And here I can use the same inventory or allowance to reduce, should we not credit inventory and call this allowance.

Bennet Tchaikovsky: To reduce inventory to the lower cost of market.

Bennet Tchaikovsky: Okay, so we're here to adjust inventory lower hostile market. Now, again, the explanation over here is kind of the same on the same video explain why. Well here's quantitatively why you're choosing each one

Bennet Tchaikovsky: As a percentage of cost of goods sold. It's immaterial here it's material here. But why do we do it you know why. What is the reason it all comes down to the investor, we do not want to be misleading our investors. It's extremely

Bennet Tchaikovsky: It's extremely important for us.

Bennet Tchaikovsky: To make sure that we're getting information to our investors that the investors have the very best information that is

Bennet Tchaikovsky: Basically that's accurate. So here I've got a cat about to have another cat attack. And then so

Bennet Tchaikovsky: I want to say goodbye.

Bennet Tchaikovsky: This up. Thank you for joining me here today.

Bennet Tchaikovsky: My cat is now eating my computer. Thank you for watching. Please do not forget to like and subscribe and send any kind of questions or comments to me at 1812 CPA gmail.com. Thanks so much.