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Hello sir,
207 CENTIPEDE in Kaplan kit 2020-2021
I came across this audit risk ,
During the interim audit, it was noted that
there were some lines of inventory which
according to the records were at least 90
days old. In addition, the inventory holding
period has increased from 47 to 54 days.here If we have a problem of inventory aging ,
the response will be to review the age inventory
aging for the slow moving inventory andDetailed cost and net realisable
value testing to be performed to
assess whether an allowance or
write down of inventory is
required.Here what is meant by the allowance of inventory and how the inventory will be written down,
Thanks
Consider a company that sells two products – AA and BB. At the y/e there are 200 units of AA and 100 units of BB. AA cost $10 a unit and BB cost $8 a unit. For the draft FS inventory is calculated at $2,800 ((200 x $10) + (100 x $8))
So Dr Inventory (SoFP) $2,800
And Cr Inventory (SoPL) $2,800After the y/e:
– product AA sells for $15 a unit with selling/distribution costs of $1 a unit (i.e. NRV is $14 which is greater than cost – so no problem).
– product BB sells for $8.50 with selling/distribution costs of $1 a unit (i.e. NRV is $7.50 which is less than cost – so a problem).BB should now be measured at $750 (100 x $7.50) which is $50 less than cost. If writing down the inventory (like writing off a bad debt):
Dr Inventory (SoPL) $50
And Cr Inventory (SoFP) $50Alternatively, make an allowance (like making an allowance for doubtful debts):
Dr Cost of sales (SoPL) $50
And Cr Inventory allowance (SoFP) $50It doesn’t matter which, inventory will be carried in SoFP at $2,750 ($2,800 – $50) and profit has been reduced by $50.
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