Putting a value on Inventory<br />
Product vs Period Costs<br />Sarshi’sSports Store<br />
Cost of inventory<br />Is basically the purchase price of an item<br />May include other expenses incurred in buying that ...
Where do you want the 10 trampolines? <br />That will be $5 delivery cost for each trampoline<br />
Situation 2<br />
??How are delivery costs<br />Accounted for?<br />
That will be $5 delivery cost for each trampoline<br />
Product Cost<br />It is clearthat the $5 is per trampoline<br />Where cartage can be identified to individual inventory it...
On the fourth day of August.....<br />The ‘True Sports’ sent to me......<br />30 cricket balls<br />20 tennis balls<br />1...
Period Cost<br />
Period cost<br />Happens when there are many items delivered.<br />Not possible to isolate the cartage per inventory item<...
Period cost = expense in Profit and Loss statement<br />Product cost = cost of particular inventory item or stock.<br />
Scenario <br />“Pete’s Pub Supplies” <br />Ten bar stools $75 plus delivery fee $10<br />One keg, cost $50 plus delivery f...
Determining the cost<br />Is it relevant?<br />Use the materiality test<br />Determine whether significant!<br />Will the ...
Is cost relevant or material?<br />If YES, eg purchase 1 (keg), add it to the cost of inventory<br />Enter on the stock ca...
Materiality<br />General rule = 10% cost or more makes cost relevant to inventory.<br />
Lower of cost or net realisable value<br />Basic rule = Inventory recorded at cost price<br />But....may be exceptions!<br />
NRV<br />NRV = Net Realisable Value = estimated selling cost less any costs incurred in marketing, selling or distribution...
Bar Stools<br />Expected selling price = $25<br />Pays a commission of $5<br />NRV = $20<br />
Principle of Conservatism<br />Caution when preparing reports<br />
Conservatism means......<br />Recognize losses when they if they are expected to occur<br />Recognize revenue when it s ac...
Balance Day – valuing inventory<br />Sometimes stock items may have estimated NRV lower than the cost price. Why?<br />
Superseded by new model<br />Obsolete<br />Out of season or fashion<br />Damaged<br />Shop-soiled<br />Deliberately sold b...
If inventory sold for < cost<br />NRV is used to value inventory<br />Avoids overstating the Balance Sheet<br />Cost of in...
???<br />
Stock take<br />
Compared with NRV<br />
General Entry required<br />NRV = $16000<br />Stock Card = $19000<br />Reduced value is shown as general journal entry<br />
Make adjustments to stock card!<br />
Remember!<br />Is it relevant to individual stock items<br />Is it a significant cost?<br />
Upcoming SlideShare
Loading in …5
×

Stock Valuation

1,534 views

Published on

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.

  • Be the first to comment

  • Be the first to like this

Stock Valuation

  1. 1. Putting a value on Inventory<br />
  2. 2. Product vs Period Costs<br />Sarshi’sSports Store<br />
  3. 3. Cost of inventory<br />Is basically the purchase price of an item<br />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<br />
  4. 4. Where do you want the 10 trampolines? <br />That will be $5 delivery cost for each trampoline<br />
  5. 5. Situation 2<br />
  6. 6. ??How are delivery costs<br />Accounted for?<br />
  7. 7. That will be $5 delivery cost for each trampoline<br />
  8. 8. Product Cost<br />It is clearthat the $5 is per trampoline<br />Where cartage can be identified to individual inventory items, then becomes part of the cost of that inventory item.<br />Recorded on stock card<br />
  9. 9. On the fourth day of August.....<br />The ‘True Sports’ sent to me......<br />30 cricket balls<br />20 tennis balls<br />15 helmets<br />And a slippery dip!<br />
  10. 10. Period Cost<br />
  11. 11. Period cost<br />Happens when there are many items delivered.<br />Not possible to isolate the cartage per inventory item<br />Becomes period cost and is therefore written off as an expense <br />
  12. 12. Period cost = expense in Profit and Loss statement<br />Product cost = cost of particular inventory item or stock.<br />
  13. 13. Scenario <br />“Pete’s Pub Supplies” <br />Ten bar stools $75 plus delivery fee $10<br />One keg, cost $50 plus delivery fee of $10<br />
  14. 14. Determining the cost<br />Is it relevant?<br />Use the materiality test<br />Determine whether significant!<br />Will the omission of the cost affect decision making<br />Is it relatively important?<br />
  15. 15. Is cost relevant or material?<br />If YES, eg purchase 1 (keg), add it to the cost of inventory<br />Enter on the stock card at cost price of $50 + $10<br />If NO, treat delivery fee as an expense (cartage inwards in the cost of goods sold)<br />
  16. 16. Materiality<br />General rule = 10% cost or more makes cost relevant to inventory.<br />
  17. 17. Lower of cost or net realisable value<br />Basic rule = Inventory recorded at cost price<br />But....may be exceptions!<br />
  18. 18. NRV<br />NRV = Net Realisable Value = estimated selling cost less any costs incurred in marketing, selling or distribution of item<br />Must be able to trace costs back on individual basis<br />
  19. 19. Bar Stools<br />Expected selling price = $25<br />Pays a commission of $5<br />NRV = $20<br />
  20. 20. Principle of Conservatism<br />Caution when preparing reports<br />
  21. 21. Conservatism means......<br />Recognize losses when they if they are expected to occur<br />Recognize revenue when it s actually earned<br />
  22. 22. Balance Day – valuing inventory<br />Sometimes stock items may have estimated NRV lower than the cost price. Why?<br />
  23. 23. Superseded by new model<br />Obsolete<br />Out of season or fashion<br />Damaged<br />Shop-soiled<br />Deliberately sold below cost<br />
  24. 24. If inventory sold for < cost<br />NRV is used to value inventory<br />Avoids overstating the Balance Sheet<br />Cost of inventory and its NRV be stated on individual product basis (not inventory as a whole)<br />
  25. 25. ???<br />
  26. 26.
  27. 27. Stock take<br />
  28. 28. Compared with NRV<br />
  29. 29. General Entry required<br />NRV = $16000<br />Stock Card = $19000<br />Reduced value is shown as general journal entry<br />
  30. 30.
  31. 31. Make adjustments to stock card!<br />
  32. 32. Remember!<br />Is it relevant to individual stock items<br />Is it a significant cost?<br />

×