1. FASB Accounting standards Codification ASC
• 330-10-35-1 Basic rule for using lower of cost or market
• 330-10-35-2 Regarding matching—times when utility drops below cost. Loss recognized when changes in price levels
• 35-4 –real loss sustained? –Severe erosion of demand in the industry. Significant loss of profit because the value of the memory went down.
• 35-5 –did prices go back to what it was originally? No it did not. Therefore we can write this as a loss. If it had recovered, then it would not be possible to write ths off as a loss.
• 35-7 can take a loss in this year and maybe the next year, but if the trend continues, the value of memory will drop and cannot take subsequent losses.
• 35-8 rule applied to each category or item. Itemized LCM is most conservative method.
• 35-14 – written down goods value becomes the new cost for subsequent accounting periods. (CAN’T REVERSE THIS).
• Reliance company
• Analog and mixed signal devices (60% revenue)
• Memory (40%)
• Problems because of CHINA.
• Average selling prices drop 30%
• Demand decreased because of competition. (22%)
• Sales $120 million gross profit -$30.
• Company uses LCM for categories rather than items. (no reason why)
• LCM
• Because of loss in 2004, they used LCM for Memory in January of 2005.
• Inventory write-down of $39.8
• Originally worth 129.8-39.8= 90 NRV
• Ceiling for 2004 = 90
• Floor =
• Net loss = 50.4
• Income statement prepared before inventory write-down
• China BOOM
• Prices increased by 20%.
• 2005 Revenue higher
• Revenue = 52.4 with a margin of 19.8%
• Gross profit =