| Course | ACC 421 Intermediate Financial Accounting I (ACC/421) |
|---|---|
| Week | 5 |
| Paper type | Inventory valuation paper |
| Length | about 1,020 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Accounting |
| Updated | September 2026 |
Free sample paper for ACC 421 Week 5
A Warm Winter, a Flooded Warehouse and Four Outlet Stores: Lower of Cost and Net Realizable Value, the Gross Profit Method and the Retail Inventory Method at a Composite Outdoor Apparel Company
[Student Name]
University of Phoenix
ACC/421: Intermediate Financial Accounting I
Week 5 Assignment
[Instructor Name]
[Date]
The company and all figures are composites written for a model paper; accounting rules and research findings come from the sources listed.
A composite outdoor apparel company designs jackets, fleece, base layers and pants, sells them wholesale to about 400 sporting goods stores and runs four outlet stores. It uses FIFO for most of its inventory. This year brought three problems. A warm winter left thousands of insulated jackets unsold. A burst pipe flooded one of its two warehouses in May. And its outlet stores, which track goods at retail prices, needed a year-end inventory figure at cost. In each case the company knew what its inventory had cost; what it had to decide was what that inventory was still worth. This paper applies the appropriate method to each problem.
Jackets and Net Realizable Value
Companies using FIFO or average cost must carry inventory at cost or net realizable value, whichever is lower (Financial Accounting Standards Board, 2015). At year end, the company held 6,000 insulated jackets with a cost of $84 each. Before the warm winter, wholesale customers paid $140. Now the company expects to sell them to off-price retailers for about $95, and it will spend about $18 per jacket on relabeling, freight and a broker's commission. Net realizable value is $77, which is $7 below cost. The write-down is $7 times 6,000, or $42,000, recorded by debiting a loss on inventory write-down, or cost of goods sold, and crediting inventory.
Fleece pullovers tell a different story. They cost $22, and even after a clearance discount the company expects to sell them for $31 less $3 of selling costs, a net realizable value of $28. No write-down is needed. The comparison is made item by item or by category, and the company applies it by style, which is how it plans and prices goods. Testing by broad category would have let the fleece's cushion hide part of the jacket loss, which is why the more detailed level is the more faithful choice here.
Under US GAAP, the write-down is not reversed if jacket prices recover next winter. The $77 becomes the new cost.
The Flood and the Gross Profit Method
On May 14, a pipe burst in the company's older warehouse. No count had been taken since the year-end count on December 31, and the insurer needed an estimate of the inventory on hand at the time of the flood. The gross profit method provides it.
Inventory at the warehouse on January 1 was $1.2 million at cost. Purchases received there from January 1 to May 14 were $3.4 million, so goods available for sale were $4.6 million. Sales shipped from the warehouse over the same period were $5.0 million. The company's gross profit rate has averaged 35% of sales for the last three years, so cost of goods sold is estimated at 65% of $5.0 million, or $3.25 million. Estimated inventory on May 14 was $4.6 million less $3.25 million, or $1.35 million.
After the water was pumped out, staff salvaged goods in sealed cartons valued at $0.25 million at cost. The estimated inventory lost is $1.1 million, which the company records as a loss and claims from its insurer.
The gross profit method is only as good as its rate. This year's rate may differ from the three-year average if prices or the product mix changed, and the insurer will ask for evidence. The company provided monthly gross margins for the warehouse's customers, which ranged from 33% to 37%.
Outlet Stores and the Retail Method
The four outlet stores record goods at their retail price tags. To report ending inventory at cost without a count at cost, the company uses the conventional retail method.
Beginning inventory at the outlets was $180,000 at cost and $300,000 at retail. Purchases were $540,000 at cost and $880,000 at retail. Net markups, mostly on popular items restocked at higher prices, were $20,000 at retail. Goods available were therefore $720,000 at cost and $1.2 million at retail, a cost-to-retail ratio of 60%.
Net markdowns during the year were $60,000, and sales were $850,000. Ending inventory at retail is $1.2 million less $60,000 less $850,000, or $290,000. At the 60% ratio, ending inventory at cost is $174,000.
Excluding markdowns from the ratio is the key feature of the conventional method. Had markdowns been included, the ratio would have been $720,000 divided by $1,140,000, about 63%, and ending inventory would have been about $183,000. The conventional method's lower figure approximates the lower of cost or market, since goods that were marked down are presumed to be worth less.
What the Estimates Do to Profit
Together, the jacket write-down, the flood loss and the retail method's conservative ratio reduce this year's reported income. Jennings et al. (1996) examined how inventory measurement choices affect the usefulness of income statement and balance sheet figures, a reminder that the same choices that make one statement more informative can make another less so. Thomas and Zhang (2002) found that unusual increases in inventory were followed by lower future returns, which is one reason analysts and auditors watch inventory estimates closely.
Controls Over the Estimates
The company's auditors will test each estimate. For the jackets, they will compare expected off-price prices with actual sales after year end. For the flood, they will recompute the gross profit rate from the accounting records and review the insurance settlement. For the outlets, they will observe a physical count at retail at one store and compare shrinkage with the estimate. Weygandt et al. (2021) note that the retail and gross profit methods are acceptable for interim reports and special situations but do not replace an annual physical count.
Conclusion
The apparel company used three tools for three problems: lower of cost and net realizable value to write down jackets the warm winter left unsold, the gross profit method to estimate the inventory lost in a flood and the conventional retail method to value outlet stock at cost. Each produced a defensible figure, and each rests on estimates that must be documented and tested.
References
Financial Accounting Standards Board. (2015). Inventory (Topic 330): Simplifying the measurement of inventory (Accounting Standards Update No. 2015-11).
Jennings, R., Simko, P. J., & Thompson, R. B., II. (1996). Does LIFO inventory accounting improve the income statement at the expense of the balance sheet? Journal of Accounting Research, 34(1), 85-109. https://doi.org/10.2307/2491333
Thomas, J. K., & Zhang, H. (2002). Inventory changes and future returns. Review of Accounting Studies, 7(2-3), 163-187. https://doi.org/10.1023/A:1020221918065
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
What the ACC 421 Week 5 instructions ask
In ACC 421 Week 5, students are generally asked to apply inventory valuation methods and estimation techniques. Common requirements include applying the lower of cost and net realizable value rule, or lower of cost or market for companies using LIFO or the retail method, estimating inventory with the gross profit method and using the retail inventory method, sometimes in its conventional form. Some prompts add purchase commitments, relative sales value or inventory errors and their effects on two years of statements. The paper should show calculations, record any required write-downs and explain when each method is appropriate, with APA citations of the textbook and the relevant accounting standard.
How this ACC 421 Week 5 example is built
An apparel company brings the three topics together naturally: fashion and weather make selling prices uncertain, a warehouse loss requires an estimate when no count is possible and outlet stores track goods at retail prices. The paper treats each as a separate business problem. The write-down section compares cost with net realizable value item by item and records the loss. The flood section works from the accounting records to an estimated inventory at the date of the loss, then subtracts salvaged goods. The retail method section computes a cost-to-retail ratio that includes markups but excludes markdowns and explains why. A closing section connects the three estimates to profit and to how an auditor would test them.
ACC 421 Week 5 grading rubric: where the points go
The rubric for inventory valuation usually rewards correct application of each method, correct entries and explanation of when each method fits. Faculty check that net realizable value is estimated selling price less reasonably predictable costs of completion, disposal and transport, that write-downs are recorded and that the gross profit rate is applied to sales, not to cost, unless a markup on cost is given. Retail method calculations must treat markups and markdowns according to the version used. Explaining the purpose of each estimate and its limits adds credit. Accurate arithmetic, consistency among sections and properly formatted APA references make up the rest of the grade.
ACC 421 Week 5 help: mistakes to avoid
Students in ACC 421 Week 5 often confuse gross profit on sales with markup on cost. If the rate is stated on cost, convert it before estimating cost of goods sold. Another trap is subtracting markdowns before computing the cost-to-retail ratio in the conventional method; excluding them is what approximates lower of cost or market. Show the ratio and the goods available at both cost and retail. For net realizable value, include costs to sell, not only the expected price. Record write-downs as a loss or in cost of goods sold, and do not reverse them later under US GAAP. Finally, explain why estimates are acceptable for interim reports and insurance claims but not in place of a year-end count.
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ACC 421 Week 5 questions, answered
What does ACC/421 Week 5 usually cover?
It usually covers inventory valuation issues, such as lower of cost and net realizable value, the gross profit method, the retail inventory method and sometimes inventory errors and purchase commitments.
Where can I find a free ACC 421 Week 5 sample paper?
An outdoor apparel company example with a write-down, a flood loss estimate and a retail method calculation is posted on this page with margin notes. Your own first paper can be drafted for you free if you send the details.
What is net realizable value?
It is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
When is the gross profit method used?
It estimates inventory when a physical count is impractical, such as for interim statements or after a fire, flood or theft, using the historical gross profit rate.
Why does the conventional retail method exclude markdowns from the ratio?
Excluding markdowns produces a lower cost-to-retail ratio, which approximates the lower of cost or market and avoids overstating inventory.
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