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Inventory and IAS 2 Valuation of Inventory – Example 4 – ACCA Financial Accounting (FA) lectures

VIVA

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  1. I highly appreciate your great useful lectures, but I have a question here:
    Net realisable value is the selling price less any extra costs that there will be in order to get the
    goods in a state to be sold. So the extra costs are potential and have not been paid yet, is it realistic to subtract them from the inventory value? Pehraps some changeshappen in next year sales price or even the whole or part of the inventory be lost for some event. Then, haven’t we understimated our inventory?
    regards

  2. Suppose you had a product that needed a custom box to sell it in, so it’s a personalised box just for your company and that product. You have to buy a lot of boxes in advance to get a good price and these would presumably be part of the inventory. But they wouldn’t have any NRV on their own. Would you use a cost value for them assuming that you’d need them to sell your product?

  3. Hello sir, when it comes to cost of goods sold. If I owned a factory. The salary I pay the factory workers does that go into calculating the cost of goods sold or just simply wages and salaries. Also if I owned a restaurant does what I pay the cooks go into calculating the cost of goods sold or simply just wages and salaries?

  5. We value at the lower of the two – cost or NRV.

    Suppose cost = 15 , NRV 12.

    So we take closing stock as 12 instead of 15, so the gross profit could reduce.

    Question: when next year this closing stock becomes opening stock, would the value remain the same : 12 , or change back to its cost price : 15 ? And why.

    • We keep the value at $12. We can’t carry forward one value and then bring it forward at a different value!!

      Even if we could, think about it. We are going to sell it for $12. If we valued the inventory next year at $15 then when it is sold we would have a loss on it next year of $3. But we have already taken the loss this year because this years profit reduces by $3. We don’t want to show the loss in both years!!!

      The whole point of this rule is that we take the loss as soon as we identify it, but only take profits when they are actually made.

  7. Hi sir, I dont understand the logic behind calculating the cost at the lower value.

    Suppose desk cost $10, and I see it is damaged and thus NRV would be $8.
    (NRV is basically expected Net Profit correct ? So why give it such a complicated name?)

    I expect to sell it at a loss of $2. But if I record cost of current asset, ie the inventory @ the lower value which is $8, then within the SOPL I would be lying to myself that I did not make a loss. I would record to myself as no profit no loss ($8-$8=0). Therefore I would find it logical to always value at the higher amount, for precautions – to make sure we are not overlooking any losses.

    The lower of the two values would not make sense to me in SOPL, but only in SOFP if I want to sell my company – and not cheat the investor that the worth of my inventory is more whereas it is actually less (depreciation due to damage to goods).

    Please explain to me sir the true Logic. Greatly appreciated. The rest you wonderfully explained – and I was until now from my paid course, not understanding the difference between cost and NRV, until you made it simple ! Thanks.

    • NRV is not the expected net profit. It is the expected selling price less any expected future costs. (The name is very sensible – realisable value means sales value, and it is net because it is after subtracting any future expenses (such as selling expenses))

      If we reduce the value of the inventory (because the NRV is lower than the cost), this makes the cost of goods sold higher and the profit lower.
      That is perfectly sensible 🙂

      • So it would only be called Net profit if we substract sales value with both the future expected cost and the past cost combined ?

        Sir, I thought value means cost. Can you please demonstrate with an example how if value of inventory is recorded low, thee cost of goods thus becomes higher higher ?

      • Yes – then it would be net profit, but that is not relevant.

        Think about it. The cost of sales is opening inventory plus purchases less closing inventory. If the value of closing inventory is lower, then a lower amount is subtracted when calculating the cost of sales, and therefore the cost of sales is higher.

        Profit is sales less cost of sales. If the cost of sales is higher then the profit is lower.

        I do actually stress this in the lectures when I compare the FIFO and average methods of valuing inventory.

  9. Hello Sir, I think that you made an error in example 4 for B.
    We should value inventory at cost not realizable value. But you multiply it by $11.
    Correct me if I am wrong.

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