Chapter 9: Acquisition and Disposition of Property, Plant, and Equipment

The lower-of-cost-or-net realizable value framework serves as the primary adjustment mechanism under current GAAP, preventing asset overstatement by requiring write-downs when net realizable value falls below historical cost. The chapter explains two distinct recording approaches: the direct method, which reduces inventory to its lower value on the balance sheet, and the indirect loss method, which establishes a separate allowance account to capture the decline in value. Understanding when and how to apply these methods across different inventory cost flow assumptions ensures consistent financial reporting. The discussion progresses to specialized valuation situations, including the allocation of joint product costs using relative sales value proportions, the recognition of losses on purchase commitments before goods arrive, and treatment of retail inventory stated at selling prices rather than cost. The chapter introduces two critical estimation techniques employed when physical inventory counts are unavailable or impractical. The gross profit method leverages historical gross profit percentages to estimate ending inventory based on sales activity and beginning balances. The retail inventory method, more detailed and widely used in department stores and similar retailers, applies cost-to-retail ratios to calculate inventory value, accounting for markups and markdowns that reflect price adjustments during the period. Both methods require careful attention to the timing and nature of price adjustments to ensure accurate ratio calculation. The chapter emphasizes that inventory policies and valuation methods must be disclosed clearly in financial statements to enhance comparability and transparency. Additionally, the chapter examines how inventory write-downs and estimation techniques influence key financial metrics including profitability, working capital position, and the overall usefulness of accounting information for stakeholder decision-making.