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Hello
Sir , is an increased competition resulting decrease in selling price AND increased inventory levels the indicators for overvaluation of inventory? If yes , then please explain me how these are the indicators for overvaluation of inventory?
For reducing selling-price, it depends on how much. Inventory is values at the lower of cost and NRV. If the selling price is reduced, there is a danger that the inventory’s cost is higher than its NRV.
The main danger is that is you reduce SP you would expect goods to sell better. Here, an increase in inventory level implies that even after the reduction in SP inventory isn’t selling. In an extreme case it might never sell no matter what its SP if the competition has brought out a better or more popular product.
Sir the actual question was that
You are the audit supervisor of Seagull & Co and are currently planning the audit of your existing client, Eagle Heating
Co (Eagle), for the year ending 31 December 2014. Eagle manufactures and sells heating and plumbing equipment
to a number of home improvement stores across the country.
Eagle has experienced increased competition and as a result, in order to maintain its current levels of sales, it has
decreased the selling price of its products significantly since Se The finance director has informed your
audit manager that he expects increased inventory levels at the year end. You plan to attend the year end inventory count of Eagle.
Finance director of Eagle has also notified your manager that one of
Eagle’s key customers has been experiencing financial difficulties.
Eagle has agreed that the customer can
take a six-month payment break, after which payments will resume.
The finance director does not believe that any allowance is required against this receivable.
Your review of industry journals has identified several articles that suggest the key customer may soon cease trading.Which 2 of the following factors may indicate overvaluation of inventory at Eagle?
1) Increased inventory levels
2) increased competition resulting decrease in selling price
3) Increased turnover ratio
4) Inventory consist of heating and plumbing equipment for home improvement storesCorrect answer is 1 and 2, but I did not understand. Can you please explain me?
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