Inventory….Explain your answer

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    queeenshana
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    The closing inventory at cost of a company at 31 January 2003 amounted to $284, 700.
    The following items were included at cost in the total:
    1. 400 coats, which had cost $80 each and normally sold for $ 150 each. Owing to a defect in manufacture, they were all sold after the reporting date at 50% of their normal price. Selling expenses amounted to 5% of the proceeds.

    2. 800 skirts, which had cost $ 20 each. These too were found to be defective. Remedial work in February 2003 cost $5 per skirt, and selling expenses for the batch totalled $800. They were sold for $28 each.

    What should the inventory value be according to IAS 2 Inventories after considering the above items?
    A. $281,200
    B. $282,800
    C. $329,200
    D. None of these


    Avatar of Vipin
    Vipin
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    remember,
    inventory value is lower of cost and NRV.

    case 1.
    cost=400*80=32,000
    NRV(net realisable value)=95%*400*75(95% bcoz we deduct selling expense 5%)
    =28,500
    inventory value is lower of Cost and NRV.
    here, NRV is lower than cost. so inventory value becomes 28,500

    case 2.
    cost=800*20=16,000
    NRV=800*28-800*5-800=17600

    here cost is lower, so inventory is 16,000.

    closing value=284,700-32,000+28,500=281,200.ans.


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    queeenshana
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    Not really understanding, could you explain the NRV part for me, will be appreciated.


    Avatar of Vipin
    Vipin
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    case 1
    proceeds=50%*150*400=30000
    selling expense=5%*30000=1500
    NRV=proceeds -selling expense=30,000-1,500=28,500

    case2.
    proceeds=28*800=22,400
    remedial work costs=5*800=4,000
    selling expense=800

    NRV=proceeds-remedial work costs-selling expense
    =22,400-4,000-800
    =17,600

    post ur doubts if any.


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    queeenshana
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    At 30 September 2003 the closing inventory of a company amounted to $386,400.

    The following items were included in this total at cost:

    1,000 items which had cost $18 each. These items were all sold in October 2003 for $15 with selling expenses of $800.

    Five items which had been in inventory since 19W3, when they were purchased for $100 each, sold in October 203 for $100 each, net of selling expenses.

    What figure should appear in the companies statement of financial position at 30 September 2003 for inventory?

    A. $382, 600
    B. $384,200
    C. $387, 100
    D. $400,600


    Avatar of Vipin
    Vipin
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    item 1.

    cost =1000*18=18,000.
    NRV=1000*15-800=14,200

    inventory value = 14,200.
    item 2,
    cost =5*100=500
    NRV=5*100=500
    no change.

    closing inventory=386400-18,000+14,200=382,600.

    just check the ans.


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    queeenshana
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    For item 2, it should have been sold in October 2003 for $1000 each, net of selling price.


    Avatar of targetacca
    targetacca
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    Vipin, For the first qn, ur final equation is closing value=284,700-32,000+28,500=281,200.ans.

    why r u minusing 32000 and adding 28500.


    Avatar of Vipin
    Vipin
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    previous entry was 32,000 and the new entry is 28,500.
    it is a logic, erase the previous entry, for that i deduct 32,000.
    write the new entry, for that i added 28,500.


    Avatar of Vipin
    Vipin
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    @queeenshana said:
    For item 2, it should have been sold in October 2003 for $1000 each, net of selling price.

    i didnt understand , what u r asking me?


    Avatar of Sangria9
    Sangria9
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    @queeenshana said:
    For item 2, it should have been sold in October 2003 for $1000 each, net of selling price.

    You should correct your inventory if your net realisable value is lower than cost.

    In this case you have inventory accounted at $100 each item, and you sell it at higher price ($1000 each item), it means that your inventory in Balance sheet is OK (it isn’t overstated) and you don’t need to correct your inventory.


    Avatar of ashrafomi3191
    ashrafomi3191
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    umm it all comes from an accounting concept called PRUDENCE which means being cautious about fore-loss and not taking account of fore-gain, that is deduct the loss you can perceive but can not take account of the future profit until it is realised…..therefore we go with the net realisable value and the cost, if the net realisable value is less than cost it means there is a loss, so we take account of the loss and deduct it from assets id est closing inventory a current asset

    if you go by your question the 400 coats are sold at 80 each id est 32000 for the lot
    and can be sold at 75 each that is (400*75)=30,000 plus there is an expense which directly relates to selling, we call it selling expense of 5% that is (30000*5%)=1500 so net realizable value is (30,000-1500)=28500
    now compare it with your cost u get a loss of 3500 simply deduct it from the closing inventory


    Avatar of ashrafomi3191
    ashrafomi3191
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    and for item 2 your asking it should have been 1000 instead of 100 each it again goes with the prudence concept and future gains cannot be antipated until realised so no change for that cost (5*100)=500
    net realisable value (5*1000)=5000 furure gain is ignored u can later add it to profit in the income statement but not until u sold it, but future losses which are more likely than not should be taken into account now as a loss


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    bayigga
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    @Vipin
    Those are great answers. You have helped me understand inventory better. Thanks#


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    bayigga
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    @vipin70 said:
    previous entry was 32,000 and the new entry is 28,500.
    it is a logic, erase the previous entry, for that i deduct 32,000.
    write the new entry, for that i added 28,500.

    Thats a great answer. You sure helped me understand inventory better… thanks


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    bayigga
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    @vipin70 said:
    previous entry was 32,000 and the new entry is 28,500.
    it is a logic, erase the previous entry, for that i deduct 32,000.
    write the new entry, for that i added 28,500.

    Thats a great answer. You sure helped me understand inventory better… thanks

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