Asset Valuation
Post on 30-Dec-2015
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1
Asset Valuation
Inventories (HKSSAP 22)
Valuation of Stock
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Introduction
Hong Kong statement of Standard accounting Practice (2.122) – Inventories (i.e. Stock) is to prescribe the accounting treatment for inventories
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Inventories
Inventories are assets: Held for sale in the ordinary course of business In the process of production for such sale In the form of materials or supplies to be
consumed in the production process or in the rendering of services
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Classifications of Inventories
Merchandise Production supplies Materials Work in progress Finished goods
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Measurement of inventories
HKSSAP 22 stated that inventories should be measured at the lower of cost and net realisable value
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Cost of Inventories
The cost of inventories should comprise: Cost of purchase Cost of conversion Other costs incurred in bringing the inventories to
their present location and condition
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Cost of Purchase
The costs of purchase of inventories comprise: The purchase price Trade discount, rebates and other similar items
are deducted in determining the costs or purchase
Import duties Other taxes Transport, handling and other costs directly
attributable to the acquisition of finished goods, materials and services
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Cost of Conversion
The costs of conversion of inventories include: Costs directly related to the units of production
(e.g. direct labour) Fixed/variable production overheads (e.g.
depreciation and maintenance of factory building and equipment, indirect material
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Other Costs
Other cost are included: Cost of inventories that they are incurred in bring
the inventories to their present location and condition
For instance, include non-production overheads or the costs of designing products for specific customers in the cost of inventories
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Costs excluded from the cost of inventories Examples costs excluded from the cost of inv
entories and recognised as expenses in the period in which they are incurred are: Abnormal amounts of wasted materials, labour or
other production cost Storage costs, unless those costs are necessary i
n the production process prior to a further production stage
Administrative overheads that do not contribute to bringing inventories to their present location and condition
Selling costs
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Cost of Inventories of a Service Provider
The cost of inventories of a service provider consists of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads
Labour and other costs relating to sales and general administrative personnel are not included but are recognised as expenses in the period in which they are incurred
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Net Realisable Value (NPV)
Net realisable value is the estimating selling price in the ordinary course of business less the estimated (further) costs of completion and estimated costs necessary to make the sale (marketing, selling and distribution cost)
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Example Stock at 31 Dec 20XXArticles Categories Cost NRV 1 Hats $80 $85 2 Hats $110 $90 3 Cloths $245 $320 4 Cloths $360 $400 5 Shoes $140 $105 6 Shoes $190 $170
$1125 $1170
Use the following method to value the above stock:1. Aggregate method2. Category method3. Article method
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Aggregate method Total value of stock at cost = $1125 Total value of stock at NPV = $1170 Low figure $1125 will be chosen
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Categories methodCategories Cost NRVHats $80+110= $190 $85+90=$175
Cloths $245+360=$605 $320+400=$720
Shoes $140+190=$330 $105+170=$275The lower of cost and NRV:
Hats $175Cloths $605Shoes $275Total $1055
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Articles method
Article Lower of cost and NRV
1 $80
2 $90
3 $245
4 $360
5 $105
6 $170
$1050
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Situations where NRV is lower than cost An increase in costs or a fall in selling price Physical deterioration of stock Obsolescence of stock A deliberate pricing strategy to sell goods at a low
price Errors in production or purchasing
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Recognition as an expense
When inventories are sold, the carrying amount of those inventories should be recognized as an expense in the period in which the related revenue is recognized.
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Stock Taking Methods
Periodic Inventory Perpetual Inventory
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Periodic Inventory
The totals of purchases and issues (sales) are recorded at the end of each financial period and the balance of the inventories will only be calculated at the end of each period
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Perpetual Inventory
A running balance is maintained to record the movements of the inventories after every purchase and issue (sale) of the inventories
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Methods of inventories valuation
First-in, first-out (FIFO) Last-in, First-out (LIFO) Weighted Average Cost (AVCO) Specific Identification/Unit Cost
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First-in, First-out (FIFO)
Items of inventory which were purchased first are sold first
The cost of goods sold is based on the oldest price
The closing stock is valued at the most recent price
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Last-in, First-out (LIFO)
The items of inventory which were purchased recently are sold first
The cost of goods sold is based upon the most recent prices
The closing stock is valued at the oldest prices
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Weighted Average Cost (AVCO)
The cost of good sold and the closing stock are valued at the weighted average cost
After each purchase of stock, the average cost for each item of stock is computed
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Specific identification
Each item of stock has its own identity and it is distinguishable from any other unit
The cost of goods sold and closing stock are determined by associating the units of stock with their specific unit costs
This method is appropriate for companies that handle a relatively low volume of high-value goods such as jewellery and automobilies
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Example
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During the year of 20XX, the following were the purchases and Sales of Product A:
Receipts SalesQuantity (kilos) Price per kilo Quantity (kilos) Price per kilo
20XXJanuary 100 2February 60 5March 80 2.5May 40 3June 80 5July 50 3.5August 100 6October 100 4November 100 6
Required:Prepare trading accounts for the year of 20XX showing the gross profit if Closing stock is valued on each of the following bases:(a) FIFO (b) LIFO (c) AVCO
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FIFO
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Date
20XX
Received
Qty Price Amt.
Sold
Qty Price Amt.
Balance
Qty Price Amt.
January 100 2 200 100 2 200
February 60 2 120 40 2 80
March 80 2.5 200 40 2 80
80 2.5 200
May 40 3 120 40 2 80
80 2.5 200
40 3 120
June 40 2 80
40 2.5 100
40 2.5 100
40 3 120
July 50 3.5 175 40 2.5 100
40 3 120
50 3.5 175
August 40 2.5 100
40 3 120
20 3.5 70
30 3.5 105
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Date
20XX
Received
Qty Price Amt.
Sold
Qty Price Amt.
Balance
Qty Price Amt.
October 100 4 400 30 3.5 105
100 4 400
November 30 3.5 105
70 4 250
30 4 120
Therefore, closing stock: 30 kilos X $4 = $120
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LIFO
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Date
20XX
Received
Qty Price Amt.
Sold
Qty Price Amt.
Balance
Qty Price Amt.
January 100 2 200 100 2 200
February 60 2 120 40 2 80
March 80 2.5 200 40 2 80
80 2.5 200
May 40 3 120 40 2 80
80 2.5 200
40 3 120
June 40 3 120
40 2.5 100
40 2 80
40 2.5 100
July 50 3.5 175 40 2 80
40 2.5 100
50 3.5 175
August 50 3.5 175
40 2.5 100
10 2 20
30 2 60
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Date
20XX
Received
Qty Price Amt.
Sold
Qty Price Amt.
Balance
Qty Price Amt.
October 100 4 400 30 2 60
100 4 400
November 100 4 400 30 2 60
Therefore, closing stock: 30 kilos X $2 = $60
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AVCO
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Date
20XX
Received
Qty Price Amt.
Sold
Qty Price Amt.
Balance
Qty Price Amt.
January 100 2 200 100 2 200
February 60 2 120 40 2 80
March 80 2.5 200 40 2 80
80 2.5 200
120 2.33 280
May 40 3 120 120 2.33 280
40 3 120
160 2.5 400
June 80 2.5 200 80 2.5 200
July 50 3.5 175 80 2.5 200
50 3.5 175
130 3.75 487
August 100 2.88 288 30 2.88 87
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Date
20XX
Received
Qty Price Amt.
Sold
Qty Price Amt.
Balance
Qty Price Amt.
October 100 4 400 30 2.88 87
100 4 400
130 3.75 487
November 100 3.75 374 30 3.75 113
Therefore, closing stock: 30 kilos X $3.75 = $113
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Trading account for the year of 20XXFIFO LIFO AVCO$ $ $ $ $ $
Sales (140*$5+200*$6) 1900 1900 1900Less:COCS
Purchases 1095 1095 1095Less: Closing
Stock 120 975 60 1035 113 982925 865 918
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Comparison of three methods
There is a need for an organization to be consistent in its issue pricing methods
Because of SSAP recommendations and the Inland Revenue, the use of the FIFO or the average price system appear to be most common.
The LIFO system is generally not acceptable to the Inland and is not recommended by SSAP
Because of rising prices LIFO, by keeping down disclosed profits, paying less taxation, provides a hedge against inflation
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Goods on sales or return
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Goods received on sale or return
Our firm do not have to pay for the goods until we sell them
If our firm do sell them, we return them to our supplier
The goods do not belong to us, so the goods on sale or return at the stocktaking date, they should not be included in our stock valuation
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Goods sent on sale or return
The customer do not pay for the goods until they confirm to buy. If they do not buy, those goods will return to us
Goods on the ‘sale or return’ basis will not be treated as normal sales and should be included in the closing stock unless the sales have been confirmed by customer
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Stock &
the Balance Sheet Date
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Why occurs?
All the counting and valuation of stock is done on the last day of the accounting period
But it is difficult for large business to count it since there may be too many items of stock
The stocktaking may take place over a period of days
To get the figure of the stock valuation as on the last day of the accounting period, adjustment should be made
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Example
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ABC Ltd. has a financial year which ends on 31 December 20XX. The stocktaking is not in fact done until 8 January 20XX.
It is found that the stock value amounted to $28850 on 8 January 20XX.
The following information is available about transactions between 31 December 20XX and 8 January 20XX: Purchases since 31 December 20XX amounted to $2370 at cost Returns inwards since 31 December 20XX were $350 at selling
price Sales since 31 December 20XX amounted to $3800 at selling
price The selling price is always cost price + 25%
What is the stock value 31 December 20XX?
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ABC Ltd. Computation of stock as at 31 Dec 20XX $ $Stock at 1 Jan 20XX (at cost) 28850Add:
Less:
Stock in hand as at 31 Dec 20XX
Sales (3800-3800*25/125) 3040
Returns inwards (350-350*25/125) 280Purchases (at cost) 2370 2650
31890
29240
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