- This topic has 3 replies, 2 voices, and was last updated 2 years ago by
.
- Posts
Dear Tutor Kim,
Substantive procedures for inventory valuation often involves reviewing post year end invoices (or post year end sales value) to confirm if NRV is above the cost.
I don’t understand why they don’t review pre year-end invoices. Post year-end inventory value seems irrelevant to me.
Thank you as always.
Imagine … I am a retailer of woolly socks in the UK … everyone buys socks for someone at for Christmas (25th December). I am very busy selling lots of pairs of socks at £11.95 a pair in December. Pre year-end sales invoices are all for £11.95. My shop is shut between Christmas and New Year which is just as well because my year end is 31 December and I have to “take stock”. I count 300 pairs of socks in inventory which cost £6.50 a pair, say – so inventory valued at cost is £1,950.
On 1st January “the January sales” start and start the New Year selling socks with Christmas designs with half price/50% off/two-for-the-price-of-one/buy-one-get-one-free promotions.
I sell all 300 pairs for £1,792.50 (300*£11.95* 50%)
So what REALLY was the “worth” of the socks on 31 December? NOT £1,950, because it realised only £1,792.50. IAS 2 Inventories says the socks must be stated at the lower amount.
This is a general principle for all assets in an SoFP – they cannot (ever) be carried at more than their realisable amount. That’s why we make allowances for losses on trade receivables (for example).
Tutor Kim thank you so much for your detailed explanation. It really helped me to understand the concept.
- The topic ‘NRV question (Hyacinth 2019)’ is closed to new replies.