VCE Accounting Unit 4

1. 18.9
STOCK WRITE DOWNS
AND THEORY

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
18.9 STOCK WRITE DOWNS
AND THEORY
 In Accounting, the rule for inventory valuation is:
Inventory should be valued at the lower of:
Cost
Net Realisable
Value (NRV)or
orCost = $50 NRV = $38
This is called a
Stock Write Down of $12

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
18.9 STOCK WRITE DOWNS
AND THEORY
Income Statement
Revenue $ $
Cash sales 100000
Credit sales 20000 120000
less Cost of Goods Sold
Cost of sales 48000
Import duties 2000 50000
Gross Profit 70000
less Stock loss 900
Stock write down XXXX
Adjusted Gross Profit 68700
less Other Expenses
Rent 3000
Insurance 2400 5400
Net Profit 63300
 Stock Write Down is an
Expense
 Hence, it must be reported
in the Income Statement
 It is listed in between Gross
Profit and Adjusted Gross
Profit along with stock
loss/gain
Income Statement
Revenue $ $
Cash sales 100000
Credit sales 20000 120000
less Cost of Goods Sold
Cost of sales 48000
Import duties 2000 50000
Gross Profit 70000
less Stock loss 900
Stock write down XXXX
Adjusted Gross Profit 68700
less Other Expenses
Rent 3000
Insurance 2400 5400
Net Profit 63300

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Theory behind stock write downs…
18.9 STOCK WRITE DOWNS
AND THEORY
Conservatism
Caution must be used when preparing financial reports
• Losses are recorded when they are expected to occur
• Gains are only recognised once they are certain to happen
(i.e. they have been earned)
This is done so:
• Assets and revenues are not overstated (too high)
• Liabilities and expenses are not understated (too low)

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Theory behind stock write downs…
18.9 STOCK WRITE DOWNS
AND THEORY
Conservatism
• A business should apply caution and recognise losses when they are
expected to occur
• There is an expected loss as stock will be sold for less than its cost
• Hence, a stock write down loss must be recognised so that:
• Assets are not overstated (Stock Control)
• Expenses are not understated (Stock Write Down)
• Net Profit is not overstated

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Theory behind stock write downs…
18.9 STOCK WRITE DOWNS
AND THEORY
Relevance
Information is relevant if it influences the decision-making of the
user by helping them:
• Evaluate past, present or future decisions
• Confirm or correct past decisions

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Theory behind stock write downs…
Relevance
• A stock write down loss must be recorded as it is relevant to decision-making
• The historical cost of the stock is irrelevant as it can’t be sold for more than
that.
• Assets and Profit will be incorrect if a stock write down isn’t recorded
Balance Sheet
• The value of Assets (Stock
Control) is less than reported
• The value of Owner’s Equity
is less than reported
Income Statement
• Expenses (Stock Write Down)
are higher than reported
• Net Profit is less than
reported
18.9 STOCK WRITE DOWNS
AND THEORY

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 But some theory says cost should not be written down to the
lower of cost and net realisable value…
Historical Cost
• All transactions are recorded at their original cost (purchase price)
• All items are listed in the firm’s accounting reports at their historical
(original) price
Reliability
• Information must be free of estimates and verifiable with source
documents
• Calculation of NRV breaches this as estimates are made on selling price
and there may be no document to verify the NRV
18.9 STOCK WRITE DOWNS
AND THEORY

9. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 So which theory applies?
Historical Cost
ReliabilityRelevance
Conservatism
Stock SHOULD be written down to
the lower of cost and NRV
Stock SHOULD NOT be written
down to the lower of cost and NRV
18.9 STOCK WRITE DOWNS
AND THEORY

10. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 How do real companies value their inventory?
18.9 STOCK WRITE DOWNS
AND THEORY

11. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ11 X
SQ12 X
Ex18.7 X
Ex18.8 X
Case Study X