stock valuation

Stock ValuationStock Valuation

© Hodder Education 2008

Stock valuation

How is stock valued?

Stock should be valued at the lower of its cost and net realisable value (NRV)

(IAS 2) was (SSAP9)


Stock valuation

Usually the cost of stock is lower than its net realisable value. This could happen for a number of reasons:

Stocks might deteriorate whilst being stored.

Changes in fashion. Stocks might become obsolete due to

a change in technology or the passage of time.


Stock valuation Cost is defined as including any

expenses associated with bringing the product to its present location and condition.

There are circumstances when the net realisable value can fall below cost.


Stock valuation

The net realisable value of stock is calculated as follows:

Saleable value - expenses needed before completion of sale = net realisable value


Example

Goods cost £800, however they have been damaged during storage and will cost £200 to put them back into a saleable condition when they can be sold for £950.

£950 - £200 = £750


The concept of prudence is used when stock is valued.

Stock should not be overvalued otherwise profits will be unrealistically high.

If the net realisable value of stock is less than the cost of the stock the figure to be taken for the final accounts is that of net realisable value.


The concept of consistency should also be applied and once adopted the same basis should be used in the annual accounts unless there is good reason to change, in which case the effects on the profit should also be reported.


Valuation of closing stock when stocktaking takes place after the financial year-end

We will need to adjust the stock figure back to what it should have been at the balance sheet date.

This is done by adjusting for transactions that have taken place since the year end.


Points to note Goods are valued at the lower of cost and net

realisable value, NOT selling price, if this is given you will need to net the figure back to cost price.

Free samples are not included in the stock valuation as they are free.

Only stock for resale should be included in the stock valuation (do not include items such as cleaning material or stationery if this is not the prime business).

Goods taken for own use should be recorded as drawings.


John Smith’s accounting year ended 30 April 2007. Owing to staff shortages the usual stocktaking did not take place until 7 May 2007, when the stock was valued at £350,000. The selling price of all goods is based upon cost plus a mark up of 20%.


i) Goods with a sales value of £4,800 were returned from customers on 3 May 2007.

ii) Goods included in the stock valuation at a cost price of £10,000 were out of date on 30 April 2007, and had a saleable value of £1,200.

iii) On 4 May 2007 goods with a selling price of £14,400 were dispatched to customers.

iv) Goods with a selling price of £1,920 were withdrawn from stock on 6 May 2007 for the private use of John Smith.

v) On 2 May 2007 a supplier sent John Smith a free sample. This had been included in the stock valuation at a cost price of £1,400.

The following information is also available:


RequiredA detailed statement of the closing stock valuation for the final accounts as at 30 April 2007.


Statement of revised stock valuation as at 30 April 2007Stock valuation as at 7 May 2007

350,000

Inc Dec

(i) Sales returns 4,000

(ii) Out of date 8,800

(iii) Sales 12,000

(iv) Drawings 1,600

(v) Free samples 1,400

13,200 14,200

(1,000)

Revised stock valuation 349,000


Tips Remember calculations may require

the use of mark-up and margin. You may have to net sales price back

to cost price. Set your work out clearly using a good

layout.


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Complete task sheet.

stock valuation

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