Stock Valuation

© Hodder Education 2008 Stock valuation How is stock valued?  Stock should be valued at the lower of its cost and net realisable value (NRV) (IAS 2) was (SSAP9)

© Hodder Education 2008 Stock valuation Usually the cost of stock is lower than its net realisable value. This could happen for a number of reasons:   Stocks might deteriorate whilst being stored.   Changes in fashion.   Stocks might become obsolete due to a change in technology or the passage of time.

© Hodder Education 2008 Stock valuation  Cost is defined as including any expenses associated with bringing the product to its present location and condition.  There are circumstances when the net realisable value can fall below cost.

© Hodder Education 2008 Stock valuation The net realisable value of stock is calculated as follows: Saleable value - expenses needed before completion of sale = net realisable value

© Hodder Education 2008 Example Goods cost £800, however they have been damaged during storage and will cost £200 to put them back into a saleable condition when they can be sold for £950. £950 - £200 = £750

© Hodder Education 2008 The concept of prudence is used when stock is valued. Stock should not be overvalued otherwise profits will be unrealistically high. If the net realisable value of stock is less than the cost of the stock the figure to be taken for the final accounts is that of net realisable value.

© Hodder Education 2008 The concept of consistency should also be applied and once adopted the same basis should be used in the annual accounts unless there is good reason to change, in which case the effects on the profit should also be reported.

© Hodder Education 2008 Valuation of closing stock when stocktaking takes place after the financial year-end We will need to adjust the stock figure back to what it should have been at the balance sheet date. This is done by adjusting for transactions that have taken place since the year end.

© Hodder Education 2008 Points to note  Goods are valued at the lower of cost and net realisable value, NOT selling price, if this is given you will need to net the figure back to cost price.  Free samples are not included in the stock valuation as they are free.  Only stock for resale should be included in the stock valuation (do not include items such as cleaning material or stationery if this is not the prime business).  Goods taken for own use should be recorded as drawings.

© Hodder Education 2008 John Smith’s accounting year ended 30 April Owing to staff shortages the usual stocktaking did not take place until 7 May 2007, when the stock was valued at £350,000. The selling price of all goods is based upon cost plus a mark up of 20%.

© Hodder Education 2008 i)Goods with a sales value of £4,800 were returned from customers on 3 May ii)Goods included in the stock valuation at a cost price of £10,000 were out of date on 30 April 2007, and had a saleable value of £1,200. iii)On 4 May 2007 goods with a selling price of £14,400 were dispatched to customers. iv)Goods with a selling price of £1,920 were withdrawn from stock on 6 May 2007 for the private use of John Smith. v)On 2 May 2007 a supplier sent John Smith a free sample. This had been included in the stock valuation at a cost price of £1,400. The following information is also available:

© Hodder Education 2008 Required A detailed statement of the closing stock valuation for the final accounts as at 30 April 2007.

© Hodder Education 2008 Statement of revised stock valuation as at 30 April 2007 Stock valuation as at 7 May ,000 IncDec (i)Sales returns4,000 (ii)Out of date8,800 (iii)Sales12,000 (iv)Drawings1,600 (v)Free samples1,400 13,20014,200 (1,000) Revised stock valuation 349,000

© Hodder Education 2008 Tips  Remember calculations may require the use of mark-up and margin.  You may have to net sales price back to cost price.  Set your work out clearly using a good layout.

© Hodder Education 2008 Tasks Complete task sheet.