FAInventory....Explain your answer

remember,
inventory value is lower of cost and NRV.

case 1.
cost=400*80=32,000
NRV(net realisable value)=95%*400*75(95% bcoz we deduct selling expense 5%)
=28,500
inventory value is lower of Cost and NRV.
here, NRV is lower than cost. so inventory value becomes 28,500

case 2.
cost=800*20=16,000
NRV=800*28-800*5-800=17600

here cost is lower, so inventory is 16,000.

closing value=284,700-32,000+28,500=281,200.ans.

Not really understanding, could you explain the NRV part for me, will be appreciated.

case 1
proceeds=50%*150*400=30000
selling expense=5%*30000=1500
NRV=proceeds -selling expense=30,000-1,500=28,500

case2.
proceeds=28*800=22,400
remedial work costs=5*800=4,000
selling expense=800

NRV=proceeds-remedial work costs-selling expense
=22,400-4,000-800
=17,600

post ur doubts if any.

At 30 September 2003 the closing inventory of a company amounted to $386,400.

The following items were included in this total at cost:

1,000 items which had cost $18 each. These items were all sold in October 2003 for $15 with selling expenses of $800.

Five items which had been in inventory since 19W3, when they were purchased for $100 each, sold in October 203 for $100 each, net of selling expenses.

What figure should appear in the companies statement of financial position at 30 September 2003 for inventory?

A. $382, 600
B. $384,200
C. $387, 100
D. $400,600

item 1.

cost =1000*18=18,000.
NRV=1000*15-800=14,200

inventory value = 14,200.
item 2,
cost =5*100=500
NRV=5*100=500
no change.

closing inventory=386400-18,000+14,200=382,600.

just check the ans.

For item 2, it should have been sold in October 2003 for $1000 each, net of selling price.

Vipin, For the first qn, ur final equation is closing value=284,700-32,000+28,500=281,200.ans.


why r u minusing 32000 and adding 28500.

previous entry was 32,000 and the new entry is 28,500.
it is a logic, erase the previous entry, for that i deduct 32,000.
write the new entry, for that i added 28,500.

@queeenshana said:
For item 2, it should have been sold in October 2003 for $1000 each, net of selling price.

i didnt understand , what u r asking me?

umm it all comes from an accounting concept called PRUDENCE which means being cautious about fore-loss and not taking account of fore-gain, that is deduct the loss you can perceive but can not take account of the future profit until it is realised.....therefore we go with the net realisable value and the cost, if the net realisable value is less than cost it means there is a loss, so we take account of the loss and deduct it from assets id est closing inventory a current asset

if you go by your question the 400 coats are sold at 80 each id est 32000 for the lot
and can be sold at 75 each that is (400*75)=30,000 plus there is an expense which directly relates to selling, we call it selling expense of 5% that is (30000*5%)=1500 so net realizable value is (30,000-1500)=28500
now compare it with your cost u get a loss of 3500 simply deduct it from the closing inventory

and for item 2 your asking it should have been 1000 instead of 100 each it again goes with the prudence concept and future gains cannot be antipated until realised so no change for that cost (5*100)=500
net realisable value (5*1000)=5000 furure gain is ignored u can later add it to profit in the income statement but not until u sold it, but future losses which are more likely than not should be taken into account now as a loss

@Vipin
Those are great answers. You have helped me understand inventory better. Thanks#

Hi Vipin, I would like to ask you about the below solution u solved. I didn't get the last step the calculation of the closing value=284,700-32,000+28,500=281,200.ans Could u explain this? Is there any formular for this? vipin70 said: remember inventory value is lower of cost and NRV. case 1 cost=400*80=32,000& NRV(net realisable value)=95%*400*75(95% bcoz we deduct selling expense 5%) =28,500 inventory value is lower of Cost and NRV here, NRV is lower than cost. so inventory value becomes 28,500 case 2 cost=800*20=16,000 NRV=800*28-800*5-800=17600 here cost is lower, so inventory is 16,000 closing value=284,700-32,000+28,500=281,200.ans

Seiha: There is no formula. I suggest that you watch the free lecture on Inventory. It must be valued at the lower of cost and net realisable value.

Thanks for your fast reply and suggestion. I'll read them again carefully.

Since transaction two occured in October but the period ended in September why is transaction two included? When I asked my prof he said IAS 10 but didn't go in detail. Upon doing research I saw that the sale of inventories is an adjusting event if it gives evidence of the net realiziable value (which is why i guess transaction one is included), however, in the case of transaction two its valued at cost so why is it still included in the closing balance for September?

Purchase price of an item is $5. The estimated selling price is $7 & commission of $.50 per unit needs to be paid to sales representative. What will be the NRV for the item? Thanks in advance.

Why on earth do you not watch the free lectures on the valuation of inventory?

Purchase price = $5 Selling price = $7 Commission = $0.50 NRV: 7-0.5 = $6.5