Stock Valuation
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Transcript of Stock Valuation
Putting a value on Inventory
Product vs Period Costs
Sarshi’s Sports Store
Cost of inventory
• Is basically the purchase price of an item
• May include other expenses incurred in buying that particular item of stock. Eg costs been in getting the stock into a condition and location ready for sale
Where do you want the 10 trampolines? That will be $5
delivery cost for each trampoline
Situation 2
??HOW ARE DELIVERY COSTSACCOUNTED FOR?
That will be $5 delivery cost for each trampoline
Product Cost
• It is clear that the $5 is per trampoline
• Where cartage can be identified to individual inventory items, then becomes part of the cost of that inventory item.
• Recorded on stock card
On the fourth day of August.....
The ‘True Sports’ sent to me......
• 30 cricket balls• 20 tennis balls• 15 helmets
And a slippery dip!
Period Cost
Period cost
• Happens when there are many items delivered.
• Not possible to isolate the cartage per inventory item
• Becomes period cost and is therefore written off as an expense
• Period cost = expense in Profit and Loss statement
• Product cost = cost of particular inventory item or stock.
Scenario
“Pete’s Pub Supplies”
1. Ten bar stools $75 plus delivery fee $102. One keg, cost $50 plus delivery fee of $10
Determining the cost
• Is it relevant?• Use the materiality test• Determine whether significant!• Will the omission of the cost affect decision
making• Is it relatively important?
Is cost relevant or material?
• If YES, eg purchase 1 (keg), add it to the cost of inventory
• Enter on the stock card at cost price of $50 + $10
• If NO, treat delivery fee as an expense (cartage inwards in the cost of goods sold)
Materiality
• General rule = 10% cost or more makes cost relevant to inventory.
Lower of cost or net realisable value
• Basic rule = Inventory recorded at cost price
But....may be exceptions!
NRV
• NRV = Net Realisable Value = estimated selling cost less any costs incurred in marketing, selling or distribution of item
• Must be able to trace costs back on individual basis
Bar Stools
• Expected selling price = $25• Pays a commission of $5
• NRV = $20
Principle of Conservatism
• Caution when preparing reports
Conservatism means......
• Recognize losses when they if they are expected to occur
• Recognize revenue when it s actually earned
Balance Day – valuing inventory
• Sometimes stock items may have estimated NRV lower than the cost price. Why?
• Superseded by new model• Obsolete• Out of season or fashion• Damaged• Shop-soiled• Deliberately sold below cost
If inventory sold for < cost
• NRV is used to value inventory• Avoids overstating the Balance Sheet• Cost of inventory and its NRV be stated on
individual product basis (not inventory as a whole)
???
Stock take
Compared with NRV
General Entry required
• NRV = $16000
• Stock Card = $19000
• Reduced value is shown as general journal entry
Make adjustments to stock card!
Remember!
• Is it relevant to individual stock items
• Is it a significant cost?