04-12-2007, 07:17 PM
Q3A ltd has an item in stock which cost $1000 n can be sold for $1200.however,before it can be sold it will require to be modified at a cost of $150.the expected selling cost of the item are an additional $100.
How should this item be valued in stock?
SUGGESTED ANSWER
Stocks /inventories have to be valued at lower of cost or net realisable value (NRV).
NRV means the estimated selling price less costs incidental/necessary to make such sales.
In above case, historical cost of the item = 1000$
NRV is as under
Selling price is expected = 1,200$
Less
Modification cost to be incurred to fetch above sale pric = 150$
and,
Additional selling costs to make the sale = 100$
=
NRV = 950$
Since inventories have to be valued at lower of Cost or NRV, therefore NRV in above case is lesser than the cost i.e. 950 $ against 1000 $ cost.
Accordingly, this item will be valued at 950$.
The difference of 50 $ between cost and NRV will be charged to profit and loss account as part of cost of sales.
How should this item be valued in stock?
SUGGESTED ANSWER
Stocks /inventories have to be valued at lower of cost or net realisable value (NRV).
NRV means the estimated selling price less costs incidental/necessary to make such sales.
In above case, historical cost of the item = 1000$
NRV is as under
Selling price is expected = 1,200$
Less
Modification cost to be incurred to fetch above sale pric = 150$
and,
Additional selling costs to make the sale = 100$
=
NRV = 950$
Since inventories have to be valued at lower of Cost or NRV, therefore NRV in above case is lesser than the cost i.e. 950 $ against 1000 $ cost.
Accordingly, this item will be valued at 950$.
The difference of 50 $ between cost and NRV will be charged to profit and loss account as part of cost of sales.
