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- This topic has 8 replies, 2 voices, and was last updated 8 years ago by John Moffat.
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- October 6, 2015 at 11:40 pm #275274
Hi Mr John…I can’t comprehend why do we need to value our inventory…Its obvious that its value is the cost we paid for…Why do we need net realizable value…I think the valuation of inventory should remain fixed …For example if I buy chocolate for $20 whether I sell this for 10 or 30 its cost is 20…This is the amount I record in SOFP it’s ok if I make a loss I’ll reduce the capital otherwise I’ll increase it….Why bother then ,,,,I can’t understand.,,Thank you..
October 7, 2015 at 8:30 am #275315The easy answer is because accounting standards say that we have to!
The actual reason is that we must record losses as soon as we see that they are going to happen. If you buy for $20 but realise you will only be able to sell for $10, then you know you are going to make a loss and therefore must account for the loss immediately rather than wait until it happens.
By valuing the inventory at only 10, it will make our total profit lower than had we valued it at 20 – we will have accounted for the loss.
October 7, 2015 at 1:06 pm #275363This topic is still a bit of blurry to me…
Let’s assume $100 cash put in a bank by sole trader…
So Assets cash =100 Capital=100
And then we bought products for resale for 50$
So assets cash=50 inventory=50 Capital=100
We sold half inventory for 50 making a profit of 25, So:
Assets Cash=100 inventory=25 Capital=Opening capital+profit=125…
WELL AT THIS STAGE WE REALISE WE ONLY SELL THE REST INVENTORY FOR 20 WHICH IS NET REALISABLE VALUE ,WELL NOW HOW CAN I RECORD THIS ?
SHALL I JUST CHANGE INVENTORY 20 FROM 25 OR WHAT?
Thank you…
2 QUESTION: HOW OFTEN DO WE VALUE OUR INVENTORY AT THE END OF THE YEAR? OR ONCE WE REALISE the NRV is less than cost
do we change?
3 QUESTION: When we calculate NRV why do we do selling price less extra cost? Why what’s the reason?
THANK YOU VERY MUCH…October 7, 2015 at 2:00 pm #275417Is valuing inventory because of True and Fair value…What I mean is if We show the cost of inventory, which we paid or spent on materials to produce is more than NRV , in this case we may be cheating financial analysts or shareholders? By valuing our assets more than real..
October 7, 2015 at 5:59 pm #275448Please don’t write in capital letters!
It is not because of true and fair value – it is because we must recognise losses as soon as we realise that there will be losses as I explained before.
The inventory value is accounted for at the end of the period (the lectures on inventories explains this) and so the value we account for is the lower of the cost and the net realisable value.
October 7, 2015 at 7:01 pm #275458Ok as you said we value inventory at the end of the period…What kind of changes happen in SOFP then?
Let’s say my closing inventory is $200 and realize I can only sell this for $150 and what do we do in SOFP ? Do we just replace the amount 200 with 150? If we do this equation won’t be equal?Thank you…October 8, 2015 at 8:51 am #275491You value the inventory at 150 in the SOFP and in the SOPL.
So profit is lower and current assets are lower – it will still balance.
(You really should watch the free lectures on inventory. We do not put in one figure and then change it – we value the inventory properly and then put in the correct figure.)
October 8, 2015 at 9:41 am #275507So then the difference will be treated as a loss which decreases capital…Decrease in assets and in capital…So then we should be cautious about inventory control to avoid this unwanting situation… So is it about lifecycle of product
October 8, 2015 at 4:32 pm #275560True, although looking at the lifecycle etc is not until paper F5.
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