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Stock Valuation
UNIT 4 CH 14
| Term | Definition |
|---|---|
| The cost of stock | All costs incurred bringing stock into the location and condition ready for sale. *before sale expenses* |
| 3 E.g. Of cost of stock: | Freight in, modifications, customs/import duties. *buying E* |
| HC | stock should be valued at its original purchase price, as this value is free from error and bias, verifiable by reference to a source doc |
| 2 AP s: Why isn’t stock recorded at SP? | Conservatism: no guarantee that stock will be sold, or sold at that price, so SP recognises a gain before it is certain, thus overstating value of A (SC) ___ HC: SP not original purchase price, an cannot be verified by source doc. |
| One QC - value stock at HC? | Reliability - because this valuation will be free from error bias |
| Unit cost | the cp of each individual item/unit of stock |
| Valuing stock at SP breaches conservatism | Stock is not guaranteed to be sold at SP amount. This would recognise a gain (profit on the sale of stock) before it is certain, overstating the value of A; stock |
| GST excluded from calc of cost of stock | GST on purchases of stock will reduce the L the business owes to the ATO rather than the cost of stock, it does not affect the ec. Ben. earned from sale of stock. |
| Why accurate calc of cp of stock = important | Conservatism: In terms of valuing stock in BS Relevance: in terms of earning a NP - useful for decision making, esp the setting of SP so that they are sufficient to cover costs and provide for profit. |
| Product cost | a cost incurred in order to bring stock into a condition and location ready for sale, which can be allocated to individual units of stock on a logical basis |
| How Product costs are recorded in stock cards | Treated as each unit cost of each item of stock, not recorded separately in the stock cards but as one entry for both suppliers price and other product costs. |
| How product costs are recorded in the GL | Journals amount paid for product costs in total is entered in SC column. No separate ledger account for additional product costs (such as cartage in) as this amount is included as part of the value of stock in SC account. |
| Recording of different product costs from more than one supplier: | Recording = same, two payments can be recorded together in stock card - 2 source doc- in journals-separate recording. Stock control column correct. |
| Period Cost | Cost incurred to bring stock into a condition and location ready for sale that is not allocated to individual units of stock because there is no logical basis to do so. |
| Compared to products costs, explain 1 difference in the way period costs are recorded in stock card: | Not recorded in stock card b/c not part of unit cost of stock |
| Compared to products costs, explain 1 difference in the way period costs are recorded in GL: | Period costs = separate ledger account. Cannot be included in stock figure it must be recorded as a separate E. Period Costs are recorded separately under COGS in IS and recognised when stock is purchased. |
| Why product cost preferred over period cost, reason 1: | Cost of stock directly allocated to each unit. If unsold, the product costs are included in value of A in Stock C. |
| Why product cost preferred over period cost, reason 2: | Cost is recognised when stock is purchased. So E is allocated regardless of wether or not stock is sold. |
| Why product cost preferred over period cost, reason 3: | Effect on NP: __ B/c entire period cost is recognised as consumed in RP stock is purchased, regardless of stock still on hand, this overstates COGS and understate NP |
| Why product cost preferred over period cost, reason 4: | Effect on BS: ___ understates SC (A) b/c stock on hand remaining will be valued at just the suppliers price, not including additional costs to get stock ready for sale. |
| Two circumstances in which it would be acceptable to use period costing. | When cost cannot be allocated to each individual unit of stock on a logical basis ___ cost concerned can be allocated but is too small/immaterial/insignificant to affect decision making. |
| Referring to one QC, explain why the correct stock valuation method should be applied. | In order to include all information that is useful for decision-making (Relevance), product costing should be used wherever possible (except for the two reasons explained above). |
| Explain the circumstances under which valuing stock at its Historical Cost may breach Conservatism. | When SP falls below CP. |
| Net Realisable Value - NRV | The estimated SP of stock less any direct selling E, e.g. marketing or distribution. |
| Explain why stock would normally be valued at its cost, rather than its NRV. | Trading firms aim to generate profit by setting their SP higher than the CP. Usually, the cost of the stock would be lower than its NRV. |
| 4 reasons why NRV may fall below cost. | Physical deterioration __ purposeful decr in SP __ decr in demand, ___ obsolescence |
| How does the lower of cost and NRV rule support Conservatism: | Application of the lower of cost and NRV rule recognises losses on the stock as soon as they are probable; it ensures that stock, an asset, is not overstated. |
| Explain why the lower of cost and NRV rule should be applied to individual stock lines. | Because the CP of some lines of stock may still be lower than their NRV. These items will need to remain valued at their CP , and should not be written down. |
| Stock Write Down | E incurred when the NRV of an item of stock falls below its original purchase price. ___HC - NRV per unit |
| Why Stock Write-down is not reported as part of COGS in the IS: | It is not a cost involved in getting the stock into a position and location ready for sale. It’s written where stock loss/gain is. |
| How a Stock Write-down affects Adjusted Gross Profit: | Stock Write-down is related to stock, and will affect the overall margin that the business will earn from the sale of stock, it is reported as a deduction from Gross Profit to determine adjusted Gross Profit. |
| GJ narration for Stock write down: | Write down of x no. Of item to NRV - reason for write down (Memo Z) |
| Stock write down effect on Acc Eq: | A - decr (SC) L - o OE - decr (Stock Write Down exp decreases NP) |
| Some costs that can be product costs are treated as period costs why? | Relevance: sometimes the cost is immaterial or too small to affect decision making. More efficient/logical to treat it as one E. |
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