Stock valuation by zhangyun

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									Asset Valuation
Inventories (HKSSAP 22)
   Valuation of Stock




                          1
Introduction
   Hong Kong statement of Standard accounting
    Practice (2.122) – Inventories (i.e. Stock) is to
    prescribe the accounting treatment for
    inventories




                                                    2
Inventories
   Inventories are assets:
       Held for sale in the ordinary course of business
       In the process of production for such sale
       In the form of materials or supplies to be
        consumed in the production process or in the
        rendering of services




                                                           3
Classifications of Inventories
   Merchandise
   Production supplies
   Materials
   Work in progress
   Finished goods




                                 4
Measurement of inventories
   HKSSAP 22 stated that inventories should be
    measured at the lower of cost and net
    realisable value




                                              5
Cost of Inventories
   The cost of inventories should comprise:
       Cost of purchase
       Cost of conversion
       Other costs incurred in bringing the inventories to
        their present location and condition




                                                              6
Cost of Purchase
   The costs of purchase of inventories
    comprise:
       The purchase price
       Trade discount, rebates and other similar items
        are deducted in determining the costs or
        purchase
       Import duties
       Other taxes
       Transport, handling and other costs directly
        attributable to the acquisition of finished goods,
        materials and services
                                                             7
Cost of Conversion
   The costs of conversion of inventories include:
       Costs directly related to the units of production
        (e.g. direct labour)
       Fixed/variable production overheads (e.g.
        depreciation and maintenance of factory building
        and equipment, indirect material




                                                            8
Other Costs
   Other cost are included:
       Cost of inventories that they are incurred in bring
        the inventories to their present location and
        condition
       For instance, include non-production overheads
        or the costs of designing products for specific
        customers in the cost of inventories




                                                              9
Costs excluded from the cost
of inventories
   Examples costs excluded from the cost of
    inventories and recognised as expenses in
    the period in which they are incurred are:
       Abnormal amounts of wasted materials, labour or
        other production cost
       Storage costs, unless those costs are necessary
        in the production process prior to a further
        production stage
       Administrative overheads that do not contribute to
        bringing inventories to their present location and
        condition
       Selling costs                                    10
Cost of Inventories of a
Service Provider
   The cost of inventories of a service provider
    consists of the labour and other costs of
    personnel directly engaged in providing the
    service, including supervisory personnel, and
    attributable overheads
   Labour and other costs relating to sales and
    general administrative personnel are not
    included but are recognised as expenses in
    the period in which they are incurred
                                                11
Net Realisable Value (NPV)
   Net realisable value is the estimating selling
    price in the ordinary course of business less
    the estimated (further) costs of completion
    and estimated costs necessary to make the
    sale (marketing, selling and distribution cost)




                                                      12
Example
                  Stock at 31 Dec 20XX
 Articles     Categories         Cost          NRV
   1           Hats              $80           $85
   2           Hats              $110          $90
   3           Cloths            $245          $320
   4           Cloths            $360          $400
   5           Shoes             $140          $105
   6           Shoes             $190          $170
                                 $1125         $1170
Use the following method to value the above stock:
1. Aggregate method
2. Category method
3. Article method                                      13
   Aggregate method
       Total value of stock at cost = $1125
       Total value of stock at NPV = $1170
       Low figure $1125 will be chosen




                                               14
   Categories method
    Categories Cost                 NRV
    Hats          $80+110= $190     $85+90=$175
    Cloths        $245+360=$605     $320+400=$720
    Shoes           $140+190=$330   $105+170=$275
The lower of cost and NRV:
      Hats          $175
      Cloths        $605
      Shoes         $275
      Total         $1055
                                                    15
   Articles method
    Article      Lower of cost and NRV
      1                $80
      2                $90
      3                $245
      4                $360
      5                $105
      6                $170
                       $1050

                                         16
   Situations where NRV is lower than cost
       An increase in costs or a fall in selling price
       Physical deterioration of stock
       Obsolescence of stock
       A deliberate pricing strategy to sell goods at a low
        price
       Errors in production or purchasing



                                                           17
Recognition as an expense
   When inventories are sold, the carrying
    amount of those inventories should be
    recognized as an expense in the period in
    which the related revenue is recognized.




                                                18
Stock Taking Methods
   Periodic Inventory
   Perpetual Inventory




                          19
Periodic Inventory
   The totals of purchases and issues (sales)
    are recorded at the end of each financial
    period and the balance of the inventories will
    only be calculated at the end of each period




                                                     20
Perpetual Inventory
   A running balance is maintained to record the
    movements of the inventories after every
    purchase and issue (sale) of the inventories




                                                21
Methods of inventories valuation
   First-in, first-out (FIFO)
   Last-in, First-out (LIFO)
   Weighted Average Cost (AVCO)
   Specific Identification/Unit Cost




                                        22
First-in, First-out (FIFO)
   Items of inventory which were purchased first
    are sold first
   The cost of goods sold is based on the oldest
    price
   The closing stock is valued at the most recent
    price



                                                 23
Last-in, First-out (LIFO)
   The items of inventory which were purchased
    recently are sold first
   The cost of goods sold is based upon the
    most recent prices
   The closing stock is valued at the oldest
    prices



                                              24
Weighted Average Cost (AVCO)
   The cost of good sold and the closing stock
    are valued at the weighted average cost
   After each purchase of stock, the average
    cost for each item of stock is computed




                                                  25
Specific identification
   Each item of stock has its own identity and it
    is distinguishable from any other unit
   The cost of goods sold and closing stock are
    determined by associating the units of stock
    with their specific unit costs
   This method is appropriate for companies
    that handle a relatively low volume of high-
    value goods such as jewellery and
    automobilies
                                                     26
Example




          27
During the year of 20XX, the following were the purchases and
Sales of Product A:
                Receipts                         Sales
        Quantity (kilos) Price per kilo   Quantity (kilos) Price per kilo
20XX
January    100                   2
February                                          60               5
March       80                   2.5
May         40                   3
June                                              80               5
July        50                   3.5
August                                            100              6
October     100                  4
November                                          100              6

Required:
Prepare trading accounts for the year of 20XX showing the gross profit if
Closing stock is valued on each of the following bases:
(a) FIFO         (b) LIFO        (c) AVCO                                 28
FIFO




       29
 Date         Received           Sold           Balance
 20XX      Qty Price Amt.    Qty Price Amt. Qty Price Amt.
January    100     2   200                   100    2    200
February                      60   2   120    40    2    80
 March     80    2.5   200                    40 2 80
                                              80 2.5 200
  May      40     3    120                    40 2        80
                                             80 2.5       200
                                             40 3        120
 June                         40 2 80        40    2.5    100
                              40 2.5 100     40    3     120
  July     50    3.5   175                   40    2.5    100
                                             40    3     120
                                             50    3.5    175
August                       40 2.5 100      30    3.5    105
                              40 3 120
                                                              30
                              20 3.5 70
    Date             Received                Sold          Balance
    20XX          Qty Price Amt.        Qty Price Amt. Qty Price Amt.
   October       100       4    400                        30 3.5    105
                                                           100 4    400
  November                               30      3.5 105   30   4   120
                                         70      4 250


Therefore, closing stock: 30 kilos X $4 = $120




                                                                      31
LIFO




       32
 Date         Received           Sold           Balance
 20XX      Qty Price Amt.    Qty Price Amt. Qty Price Amt.
January    100     2   200                   100   2   200
February                      60   2   120    40   2   80
 March     80    2.5   200                   40 2 80
                                             80 2.5 200
  May      40     3    120                    40 2      80
                                             80 2.5     200
                                             40 3      120
 June                         40 3 120       40     2 80
                              40 2.5 100     40    2.5 100
  July     50    3.5   175                    40  2    80
                                             40 2.5    100
                                             50 3.5    175
August                       50 3.5    175   30    2   60
                             40 2.5    100
                                                            33
                              10 2     20
    Date             Received                Sold          Balance
    20XX          Qty Price Amt.        Qty Price Amt. Qty Price Amt.
   October        100      4    400                        30   2   60
                                                          100   4   400
  November                               100    4   400    30   2   60




Therefore, closing stock: 30 kilos X $2 = $60




                                                                    34
AVCO




       35
 Date         Received        Sold          Balance
 20XX      Qty Price Amt. Qty Price Amt. Qty Price Amt.
January    100        2   200                      100    2     200
February                        60    2     120     40    2     80
 March     80    2.5      200                      40 2 80
                                                   80 2.5 200
                                                  120 2.33 280
  May      40     3       120                     120    2.33 280
                                                   40     3   120
                                                  160    2.5 400
 June                           80    2.5   200   80     2.5    200
  July     50    3.5      175                      80    2.5 200
                                                   50    3.5 175
                                                  130    3.75 487
August                          100   2.88 288     30    2.88    87

                                                                      36
 Date            Received                Sold          Balance
 20XX         Qty Price Amt.        Qty Price Amt. Qty Price Amt.
October       100      4     400                        30 2.88 87
                                                        100 4 400
                                                       130 3.75 487
November                            100     3.75 374   30   3.75   113


  Therefore, closing stock: 30 kilos X $3.75 = $113




                                                                     37
            Trading account for the year of 20XX
                FIFO          LIFO          AVCO
                $      $      $      $      $    $
Sales
(140*$5+200*$6)       1900      1900      1900
Less:COCS
      Purchases 1095       1095      1095
      Less: Closing
            Stock 120 975 60    1035 113 982
                      925       865       918




                                                     38
Comparison of three methods
   There is a need for an organization to be consistent
    in its issue pricing methods
   Because of SSAP recommendations and the Inland
    Revenue, the use of the FIFO or the average price
    system appear to be most common.
   The LIFO system is generally not acceptable to the
    Inland and is not recommended by SSAP
   Because of rising prices LIFO, by keeping down
    disclosed profits, paying less taxation, provides a
    hedge against inflation
                                                           39
Goods on sales or return




                           40
Goods received on sale or return
   Our firm do not have to pay for the goods
    until we sell them
   If our firm do sell them, we return them to our
    supplier
   The goods do not belong to us, so the goods
    on sale or return at the stocktaking date, they
    should not be included in our stock valuation


                                                  41
Goods sent on sale or return
   The customer do not pay for the goods until
    they confirm to buy. If they do not buy, those
    goods will return to us
   Goods on the ‘sale or return’ basis will not be
    treated as normal sales and should be
    included in the closing stock unless the sales
    have been confirmed by customer


                                                  42
        Stock
          &
the Balance Sheet Date



                         43
Why occurs?
   All the counting and valuation of stock is
    done on the last day of the accounting period
   But it is difficult for large business to count it
    since there may be too many items of stock
   The stocktaking may take place over a period
    of days
   To get the figure of the stock valuation as on
    the last day of the accounting period,
    adjustment should be made

                                                     44
Example




          45
   ABC Ltd. has a financial year which ends on 31 December 20XX.
    The stocktaking is not in fact done until 8 January 20XX.
   It is found that the stock value amounted to $28850 on 8 January
    20XX.
   The following information is available about transactions between
    31 December 20XX and 8 January 20XX:
     Purchases since 31 December 20XX amounted to $2370 at cost
     Returns inwards since 31 December 20XX were $350 at selling
         price
     Sales since 31 December 20XX amounted to $3800 at selling
         price
     The selling price is always cost price + 25%
   What is the stock value 31 December 20XX?

                                                                    46
                   ABC Ltd.
       Computation of stock as at 31 Dec 20XX
                                          $       $
Stock at 1 Jan 20XX (at cost)                   28850
Add: Sales (3800-3800*25/125)                    3040
                                                31890

Less: Returns inwards (350-350*25/125)   280
     Purchases (at cost)                 2370    2650
Stock in hand as at 31 Dec 20XX
                                                29240




                                                   47

								
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