2. How do we work out the value for stock?

3. We count the number of items (stocktake) and multiply it by the cost of each stock item. How do we work out the value for stock?

4. But what if we sell the stock for less that we bought it for?

5. We use which ever is lower – the cost of buying the stock or the selling price.

6. This complies with Conservatism – recognising a loss (Stock Write Down) as soon as it happens.

7. Lower of Cost and Net Realisable Value Cost = the total of the cost of purchase plus the cost incurred to get it ready for resale But what are these costs?

8. Any cost incurred with getting stock ready for resale i.e. buying costs Customs Duty or Export fees –The cost of getting stock into the country from overseas. Freight in –The cost of transporting the cost from the supplier to the business. Modifications –Any changes made to a particular line of stock - just like when we buy a Non Current Asset and installation is included in the Historical Cost

9. Buying costs are divided into: Product Costs –Can be linked on ONE line of stock –Are recorded on the STOCK CARDS –Reported in the Profit & Loss Statement as part of COST OF SALES Period Costs –Can be linked to MANY lines of stock –Are recorded in their own LEDGER ACCOUNT –Reported in the Profit & Loss Statement UNDERNEATH Cost of Sales

10. Product Costs are related to one line of stock Modifications to one line of stock Cartage or Freight on one line of stock

11. Period costs relate to many stock lines The Cartage or Freight for two or more stock lines per delivery. Insurance on all the stock. Modification to more than one line of stock.

12. All Buying Costs are reported in the Profit & Loss Statement Profit & Loss Statement Revenue Sales Less Cost of Goods Sold Cost of Sales (including Freight for one line of stock) Freight (applies to a number of lines of stock)

13. Lower of Cost and Net Realisable Value NRV = the estimated proceeds of sale (selling price) less any costs associated with selling the stock

14. Any costs associated with selling the stock or selling costs Commissions to salesman –The salesman is paid a bonus for every item of stock he sells Advertising or promotion –Which relates to a particular line of stock

15. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 40 4 Bats 30 50 5 50 5 Gloves 40 100 10 200 20 Buying cost include Freight or modification so the stock is ready for sale. Selling cost include advertising or what ever it costs to sell the stock.

16. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 12 40 4 Bats 30 50 5 50 5 Gloves 40 100 10 200 20 Add the purchase price & the buying costs

17. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 12 40 4 Bats 30 50 5 55 50 5 Gloves 40 100 10 200 20 Add the purchase price & the buying costs

18. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 12 40 4 Bats 30 50 5 55 50 5 Gloves 40 100 10 110 200 20 Add the purchase price & the buying costs

19. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 12 40 4 36 Bats 30 50 5 55 50 5 Gloves 40 100 10 110 200 20 Selling price less the selling costs

20. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 12 40 4 36 Bats 30 50 5 55 50 5 45 Gloves 40 100 10 110 200 20 Selling price less the selling costs

21. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 12 40 4 36 Bats 30 50 5 55 50 5 45 Gloves 40 100 10 110 200 20 180 Selling price less the selling costs

22. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 12 40 4 36 Bats 30 50 5 55 50 5 45 Gloves 40 100 10 110 200 20 180 Stock write down = only on items where NRV is less than cost

23. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 12 40 4 36 Bats 30 50 5 55 50 5 45 Gloves 40 100 10 110 200 20 180 Stock write down = only on items where NRV is less than cost Bat Cost = $55 but NRV = $45 So a Stock write down of $10

24. A B C D E F G H Items Quantity Purchase Buying COSTRealisable Selling Net Price Costs Value CostsRealisable Value C + D F - G Balls 20 10 2 12 40 4 36 Bats 30 50 5 55 50 5 45 Gloves 40 100 10 110 200 20 180 Stock write down = only on items where NRV is less than cost Bat Cost = $55 but NRV = $45 So a Stock write down of $10 Bats @ $10 per item x 30 = a Stock Write down Expense of $300

25. Stock Cards of Bats DateDetailsQtyCostValueQtyCostValueQtyCostValue Mar 2 nd Balance113556215 May 1stInv. 3410555500103555665 Jun 5thRec. 195055275053552915 Oct 9 th Inv. 59155582538552090 Jan 16 th Rec. 3455527533551815 Feb 25 th Rec. 5035516530551650 Jun 30 th Memo 4301030030451350 The last 30 items where written down from $55 to $45 each. The number of items recorded in the Qty column remains the same.

26. All transactions must be recorded in a journal Stock write down is –Unusual –Non cash –Infrequent So it will be recorded in the General Journal

27. DateDetailsDebitCredit June 30thStock Write Down300 Stock Control300 Adjusting entry for stock Write down (Memo 14) Stock Write Down is an increasing expense = Dr Stock is a decreasing asset = Cr

28. Reporting Stock Write Down in the Profit & Loss Statement Revenue Sales Less Cost of Goods Sold Freight Gross Profit Less Stock Loss Stock Write Down300 Adjusted Gross Profit

29. Balance Sheet Current Assets Stock will be reported at the lower figure e.g. Stock at start less $300

30. Stock Gains Reminder Stock gains are to be determined by using the lowest available price in the balance column of the stock card, as required by the Conservatism accounting principle so stock is not overstated in Stock control. When there is stock purchases at two different prices, look in the balance column and use whichever value is lowest.

31. Stock Gain of 12 DateDetailsQtyCostValueQtyCostValueQtyCostValue Mar 2 nd Balance113556215 May 1stInv. 3410555500103555665 Jun 5thRec. 195055275053552915 Oct 9 th Inv. 59155582538552090 Jan 16 th Rec. 3455527533551815 Feb 25 th Rec. 5035516530551650 Jun 30 th Memo 4301030030451350 July 5 th Rec 30105050030 10 45 50 1350 500

32. Stock Gain of 12 DateDetailsQtyCostValueQtyCostValueQtyCostValue Mar 2 nd Balance113556215 May 1stInv. 3410555500103555665 Jun 5thRec. 195055275053552915 Oct 9 th Inv. 59155582538552090 Jan 16 th Rec. 3455527533551815 Feb 25 th Rec. 5035516530551650 Jun 30 th Memo 4301030030451350 July 5 th Rec 30105050030 10 45 50 1350 500 Aug 4 th Memo 6124554042 50 45 50 1890 500

33. Stock Losses Reminder It is assumed that a stock loss is the oldest stock purchased and therefore the stock loss is recorded at the lower value. This conforms with the FIFO assumption.

34. Stock Loss of 12 DateDetailsQtyCostValueQtyCostValueQtyCostValue Mar 2 nd Balance113556215 May 1stInv. 3410555500103555665 Jun 5thRec. 195055275053552915 Oct 9 th Inv. 59155582538552090 Jan 16 th Rec. 3455527533551815 Feb 25 th Rec. 5035516530551650 Jun 30 th Memo 4301030030451350 July 5 th Rec 30105050030 10 45 50 1350 500

35. Stock Loss of 12 DateDetailsQtyCostValueQtyCostValueQtyCostValue Mar 2 nd Balance113556215 May 1stInv. 3410555500103555665 Jun 5thRec. 195055275053552915 Oct 9 th Inv. 59155582538552090 Jan 16 th Rec. 3455527533551815 Feb 25 th Rec. 5035516530551650 Jun 30 th Memo 4301030030451350 July 5 th Rec 30105050030 10 45 50 1350 500 Aug 4 th Memo 62 10 45 50 90 100 28451890

36. You should now be able to Complete exercises And the Review Questions