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Stock Valuation
 

Stock Valuation

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This presentation has been put together for year 12 accounting students studying their VCE in Victoria, Australia. It outlines the difference between product and period costs, how they are recorded. ...

This presentation has been put together for year 12 accounting students studying their VCE in Victoria, Australia. It outlines the difference between product and period costs, how they are recorded. It also discusses net realisable value and its treatment in the accounting records.

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    Stock Valuation Stock Valuation Presentation Transcript

    • Putting a value on Inventory
    • Product vs Period Costs
      Sarshi’sSports Store
    • Cost of inventory
      Is basically the purchase price of an item
      May include other expenses incurred in buying that particular item of stock. Egcosts 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 costs
      Accounted for?
    • That will be $5 delivery cost for each trampoline
    • Product Cost
      It is clearthat 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”
      Ten bar stools $75 plus delivery fee $10
      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?