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- May 19, 2018 at 6:30 am #452775
Sir , what does inventory witten off means in accounting ?
Is there any difference between government grant received and government grant amortization ?
These items were found separating from cash flow stamrent so I do not get it.
Thanks in advance !
May 19, 2018 at 6:31 am #452776Inventory written off I taught it means written down in entry for less than their carrying value . Like where you have a volatile market place e.e fashion that goes outdated .
May 19, 2018 at 6:41 am #452780“Inventory written off”? – where inventory has become old, damaged or obsolete its net realisable value may have fallen below cost
And we already know that inventory should be valued at the lower of cost and net realisable value
So we need to reduce the value of our inventory by the appropriate amount to write it down to its new re-calculated lower value
But it’s not a cash transaction – it’s a non-cash expense so needs to be added back into the profits to arrive at net cash flow from operating activities
“Grants received and grants amortised” – the receipt of a grant involves the double entry:
Dr Cash (say $1,000)
Cr Government Grant $1,000So that clearly involves a flow of cash and will feature (probably) in the investing activities section (where the grant relates to an asset)
But the benefit of that grant should be spread over the same life span as the asset to which it relates (say 10 years) and therefore we need to amortise it over that same 10 year period at the rate of $100 each year
The double entry involved is:
Dr Government Grant $100
Cr (probably) Cost of Sales $100It’s a bit like thinking about negative depreciation in that the amortisation of the grant reduces the affect of the depreciation
But it’s not a cash transaction – it’s a non-cash income so needs to be deducted from the profits to arrive at net cash flow from operating activities
Clear?
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