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I’m bit confused with this inventory valuation
Where we are valuing inventory at NRV or Cost which ever is lower, but it affects current year gross profit , even though cost is reduced for next yr.
The closing stock are sold during next year, So why are we adjusting that loss in the current year itself?
Hi,
We are following the concept of prudence in our valuation. If we anticipate selling the inventory below its cost then the loss is recognised in the current year’s accounts immediately, we do not wait to recognise the reduction in value.
Thanks
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Thank you so much Sir!
Hello sir. I have a doubt in an adjustment in one of the Single Entity Financial Statement from the Kaplan Exam Kit 353-Highwood. the adjustment reads:
The inventory of Highwood was not counted until 4 April 20X1 due to operational
reasons. At this date its value at cost was $36 million and this figure has been used in
the cost of sales calculation above. Between the year end of 31 March 20X1 and
4 April 20X1, Highwood received a delivery of goods at a cost of $2.7 million and
made sales of $7.8 million at a mark-up on cost of 30%. Neither the goods delivered
nor the sales made in this period were included in Highwood’s purchases (as part of
cost of sales) or revenue in the above trial balance.The solution given is:
Inventory adjustment
Goods delivered (deduct from closing inventory) (2,700)
Cost of goods sold (7,800 × 100/130) (add to closing inventory) 6,000
Net increase in closing inventory 3,300My question is why are deducting and adding the respective amounts to closing inventory?
Also, 3300 is deducted from Cost of Sales as well, why?Hi,
The inventory count took place four days after the reporting date, so we need to use this figure and work backwards using the sales/purchases that have taken place in this period.
Any sales of inventory will need to be added to the figure as these will have been in the year-end inventory but will not be included in our 4 April figure as they were sold.
Any purchase of inventory will need to be deducted from the figure as these will not have been in inventory at the reporting date but will have been included in our count on the 4 April.
It is a tricky one but not something that we’ve seen very often in the exam.
Thanks
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