How do we work out the value for stock?

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?

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

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

We use which ever is lower

– the cost of buying the stock

or the selling price.

This complies with Conservatism – recognising a loss (Stock Write

Down) as soon as it happens.

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?

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

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

Product Costs are related to one line of stock

• Modifications to one line of stock

• Cartage or Freight on one line of stock

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.

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)

Lower of Cost and Net Realisable Value

• NRV = the estimated proceeds of sale (selling price) less any costs associated with selling the stock

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

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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.

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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 NRVis less than cost

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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

A B C D E F G H

Items Quantity Purchase Buying COST Realisable Selling Net

Price Costs Value Costs Realisable

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

Stock Cards of Bats

Date Details Qty Cost Value Qty Cost Value Qty Cost Value

Mar 2nd Balance 113 55 6215

May 1st Inv. 34 10 55 5500 103 55 5665

Jun 5th Rec. 19 50 55 2750 53 55 2915

Oct 9th Inv. 59 15 55 825 38 55 2090

Jan 16th Rec. 34 5 55 275 33 55 1815

Feb 25th Rec. 50 3 55 165 30 55 1650

Jun 30th Memo 4 30 10 300 30 45 1350

The last 30 items where written down from $55 to $45 each.

The number of items recorded in the Qty column remains the same.

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

General Journal

Date Details Debit Credit

June 30th Stock Write Down 300

Stock Control 300

Adjusting entry for stock

Write down (Memo 14)

Stock Write Down is an increasing expense = DrStock is a decreasing asset = Cr

Reporting Stock Write Down in the Profit & Loss Statement

Revenue

Sales

Less Cost of Goods Sold

Freight

Gross Profit

Less Stock Loss

Stock Write Down 300

Adjusted Gross Profit

Balance Sheet

Current Assets

Stock will be reported at the lower figure e.g. Stock at start less $300

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.

Stock Gain of 12

Date Details Qty Cost Value Qty Cost Value Qty Cost Value

Mar 2nd Balance 113 55 6215

May 1st Inv. 34 10 55 5500 103 55 5665

Jun 5th Rec. 19 50 55 2750 53 55 2915

Oct 9th Inv. 59 15 55 825 38 55 2090

Jan 16th Rec. 34 5 55 275 33 55 1815

Feb 25th Rec. 50 3 55 165 30 55 1650

Jun 30th Memo 4 30 10 300 30 45 1350

July 5th Rec 30 10 50 500 3010

4550

1350500

Stock Gain of 12

Date Details Qty Cost Value Qty Cost Value Qty Cost Value

Mar 2nd Balance 113 55 6215

May 1st Inv. 34 10 55 5500 103 55 5665

Jun 5th Rec. 19 50 55 2750 53 55 2915

Oct 9th Inv. 59 15 55 825 38 55 2090

Jan 16th Rec. 34 5 55 275 33 55 1815

Feb 25th Rec. 50 3 55 165 30 55 1650

Jun 30th Memo 4 30 10 300 30 45 1350

July 5th Rec 30 10 50 500 3010

4550

1350500

Aug 4th Memo 6 12 45 540 4250

4550

1890500

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.

Stock Loss of 12Date Details Qty Cost Value Qty Cost Value Qty Cost Value

Mar 2nd Balance 113 55 6215

May 1st Inv. 34 10 55 5500 103 55 5665

Jun 5th Rec. 19 50 55 2750 53 55 2915

Oct 9th Inv. 59 15 55 825 38 55 2090

Jan 16th Rec. 34 5 55 275 33 55 1815

Feb 25th Rec. 50 3 55 165 30 55 1650

Jun 30th Memo 4 30 10 300 30 45 1350

July 5th Rec 30 10 50 500 3010

4550

1350500

Stock Loss of 12Date Details Qty Cost Value Qty Cost Value Qty Cost Value

Mar 2nd Balance 113 55 6215

May 1st Inv. 34 10 55 5500 103 55 5665

Jun 5th Rec. 19 50 55 2750 53 55 2915

Oct 9th Inv. 59 15 55 825 38 55 2090

Jan 16th Rec. 34 5 55 275 33 55 1815

Feb 25th Rec. 50 3 55 165 30 55 1650

Jun 30th Memo 4 30 10 300 30 45 1350

July 5th Rec 30 10 50 500 3010

4550

1350500

Aug 4th Memo 6 210

4550

90100

28 45 1890

You should now be able to

• Complete exercises

• And the Review Questions