Stock Valuation
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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?