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We have situation as followings:
– The period ended at 31 January 20×3
– At end of the period, we have 800 skirts, cost $20 each which were found to be defective. Remedial work in Feb 20X3 cost $8 per skirt, and selling expenses for the batch totalled $1,600. They were sold for $28 each.–> my solution:
Cost totalled to: $16,000
NAV: 800*(28-8) – 1,600 = $14,400–> Hence, NAV will use to value the closing inventory at $14,400.
my question is that: when Closing inventory is valued at $14,400, all the damaged cost has been covered in COGS. When the remedial work happened in Feb 20X3 (after closing), how could we account for the expense there. If possible, please give me the entry as well.
Many thanks.
You do not mean NAV – it is NRV (net realisable value).
When the remedial work is carried out in February, we will credit cash and debit expenses (and hence it will reduce the profit).
We have not charged the expense this year, all we have done is put in a lower figure for inventory.
Although closing inventory this year is lower because of using NRV, don’t forget that it will mean opening inventory next year will be lower as well. This would mean lower profit this year but higher profit next year – no difference overall – but charging the expense when we pay it means that the overall profit will end up being lower, which is correct.
This is a little bit complicated. Please see if my understanding is correct
1) expense has been charged in the year of recognising lower nrv by higher cost of goods sold, as prudent concept said: expense is recorded as soon as it is probably happened
2) next year, lower cost of goods sold is net of with actual expense. Hence, nothing happenedThanks a lot
what about if you are given sales and purchases and the markup and told to find the inventory value what can i do
If you know the sales and the mark-up, then you can work out the cost of sales (see my free lecture if you are not sure about how to do this).
When you know the cost of sales then you can work out the inventory as a missing figure (cost of sales = opening inventory + purchases – closing inventory)
a company s financial statements must disclose the accounting policies used in measuring inventories.
is it correct and what does it mean?Thank you!
Ann’s business received a fabric on 29 june 2006, which was included in inventory in 30 june 2006 the invoice was recorded in July 2006
What does it mean// how it affects to inventory and COGS?
Accounting policy: Yes it is correct. They must state how they are valuing their inventory (average cost or FIFO)
If they received the goods on 29 June, then they were correct to include it in inventory at 30 June. However they should have recorded the invoice in June also.
Because it has not been recorded it means that the cost of goods sold is too low at the moment.
What would be effect on profit discovering inventory with cost of 1250 and a net realisible vlue 1000 assuming same inventory had not been included in original inventory count?
Dear John
1)is it closing or opening inventory?
2)As we know if it is not included
then COGS will be higher, is it right?
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