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Hi Sir, I would like to ask why does management do a provision of $35,000 in error 3 for the slow moving inventory?
Are you asking why management HAS made a $35,000 provision?
The question explains why ….”The estimate relates to slow-moving inventory in respect of a particular type of steel alloy for which demand has fallen. Management has already recognised a provision of $35,000, which is considered insufficient by the auditor.”
It’s because demand for this particular item of inventory has fallen and the net realisable value is estimated by management to be $35,000 lower than cost. The auditors don’t agree with this estimate and believe that it should be $10,000 more
OK?
Sort of understand Sir.
According to FRS2 , management need to create a provision for slow moving inventories just in case it become obsolete? Am i right?
And also is it Net realisable value is always equal to provision recognised by management?
“According to FRS2 , management need to create a provision for slow moving inventories just in case it become obsolete? Am i right?” – the provision is created because, if the inventory is slow moving, that would suggest that demand has fallen since the inventory was acquired.
And if demand has fallen, it’s probable that the company will not be able to sell the inventory at an amount greater than cost. there are a number of reasons why this situation could have arisen and, yes, one of them is obsolescence
“And also is it Net realisable value is always equal to provision recognised by management?” – no! The provision is the difference between cost and net realisable value
If we have a cost of $100 and a net realisable value of $80, the provision is $20, not $80
OK?
Very well explained.. spot on.. to the point… clearly shows the experience you have sir mike little…. …
.. sir what you doing for us is brilliant.. may god reward you…
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