18.7 lower of cost and net realisable value
TRANSCRIPT
18.7LOWER OF COST AND NET REALISABLE VALUE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
18.7 LOWER OF COST AND
NET REALISABLE VALUE Example: a retailer purchased 10,000
iPods in 2006 thinking they could be sold easily for the next 10 years. The iPods cost the retailer $250 each.
The retailer didn’t anticipate the iPhone making the iPod obsolete , and today the retailer has 1,000 iPods left that can be sold for only $150 each.
How should these be valued today?2006 Cost of Stock
$250
Current Selling Price $150
Vs.
Relevance?
Reliability?
Historical Cost?
Conservatism?
Consistency?
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Inventory is not always valued at its “cost” price. Sometimes, the amount stock can be sold for is less than it actually costs
Example… hotel rooms
$199Usual cost of 1 room at Hotel Windsor site
$149Today’s rate at lastminute.com.au
18.7 LOWER OF COST AND
NET REALISABLE VALUE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Example… David Jones swimwear in June, July and August
Why is swimwear on sale this time every year?
18.7 LOWER OF COST AND
NET REALISABLE VALUE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Why do businesses sell stock for less than its cost? Sometimes a business will sell an item of stock for less than its cost because the item of inventory:
Has been superseded by a newer model, e.g. old model iPhone
Has become obsolete, e.g. typewriters, CDs
Is out of season, e.g. selling umbrellas during summer
Is out of fashion, e.g. wrong colour for this season
Is damaged or spoiled, e.g. bread, fruit, vegetables
Is being deliberately sold below cost, e.g. discounting to attract customers, selling tickets that would otherwise go to waste
18.7 LOWER OF COST AND
NET REALISABLE VALUE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
In Accounting, the rule for inventory valuation is:
Inventory should be valued at the lower of:
CostNet
Realisable Value (NRV)
or
18.7 LOWER OF COST AND
NET REALISABLE VALUE
The item’s Product Cost
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Net realisable value (NRV) is:
The estimated selling price of an item of inventory, less any costs incurred in
Selling
Marketing or
Distributing the stock to the customer
NRV = Estimated selling price of stock
Selling, marketing and
distribution costs
18.7 LOWER OF COST AND
NET REALISABLE VALUE
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Net realisable value (NRV) example:
On 1 December a firm has 100 coats in stock.
The Product Cost of each coat is $50
How much should the coats be valued for in the firm’s Balance Sheet?
To sell the coats in summer, the selling price has been lowered to $40
In addition, an advertisement costing $200 has been taken out in the local newspaper advertising the sale (for 100 coats)
$50?
$52?
$40?
$38?
$42?
18.7 LOWER OF COST AND
NET REALISABLE VALUE
Inventory should be valued at the lower of:
CostNet
Realisable Value (NRV)
or
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
Cost = $50
NRV =Estimated
selling price of stock
Selling,
marketing and distribution
costs$40 $2 $38=
18.7 LOWER OF COST AND
NET REALISABLE VALUE Net realisable value (NRV) example:
On 1 December a firm has 100 coats in stock.
The Product Cost of each coat is $50
To sell the coats in summer, the selling price has been lowered to $40
In addition, an advertisement costing $200 has been taken out in the local newspaper advertising the sale (for 100 coats)
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
or
In Accounting, the rule for inventory valuation is:
So the coats will be valued at…
18.7 LOWER OF COST AND
NET REALISABLE VALUEInventory should be valued at the lower of:
CostNet
Realisable Value (NRV)
or
Cost = $50 NRV = $38This is called a
Stock Write Down of $12
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
18.7 LOWER OF COST AND
NET REALISABLE VALUEIncome StatementRevenue $ $
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 Profi t and Adjusted Gross Profi t along with stock loss/gain
Income StatementRevenue $ $
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
© Michael Allison, Trinity Grammar School.Author’s permission required for external use
TASK
In-class Homework
SQ5 XSQ6 X