Stock Valuation

JodieR

My client has been running a bridal shop for about 4 years now and spotted an article in a bridal magazine saying that in the trade stock which is over a year old can be writted down by 50%, over 2 years by 80% and over 3 years by 90%. Now I've read up about the use of formulae to value stock and HMRC seem to take the view that so long as the formulae reflect a fair view of what actually happens then they're acceptable, but is it just me or do these percentages seem a little extreme? I asked the client whether the items on average were on sale for those amounts (say for example a bridesmaid's dress, bought for £40, originally retailed for £80 3 years ago, is it really going to only be on sale for just £4 now?) and he said that a lot of the items are priced higher than 10% of the cost price, but they don't expect that all will sell at those amounts. And he did give examples of £1000 dresses selling on ebay for £50.
I've not got many clients who hold a great deal of stock so I'm not sure what to do here - is it common practise to use formulae to value stock, or do I need to be a bit more cautious and get details of how much the items are on the shelves for?
Thanks
Jodie

deanshepherd

How accurate you need to be depends on how material the stock figure is to the accounts.

For a single bridal shop I suspect it is not a huge issue.

The example you give of a £40 dress is probably not what the article was thinking of. A £5,000 designer dress that has been hanging in the shop window for 3 years may indeed only fetch £500.

The shop owner will have a better idea than anyone of how much she is likely to realise from the sale of her stock. Better to have a chat with her and then use a formula based on that conversation.

Hasan.Ahmet

Stock

In simple technical terms stock is valued at lower of cost or net realisable value. What is net realisable value becomes the question need answering.

JodieR

Thanks, I know I'm probably thinking about this too much, but they do hold a lot of very old stock and it is a material figure in the accounts so I really do want to try to get it as accurate as possible.
Say, for example, they've got 5 of a certain summer dress in stock which were purchased at £100 each 3 years ago, and at the year end were on sale at £40 each. However they only expect to sell maybe 2 of these dresses in the next few months and then plan to reduce the remaining stock to £5 each to clear them. Should they then be valued at £200 (5 x £40), or £95 (2 x £40 plus 3 x £5)? I think that's what I need to get to the bottom of here!

Monsoon

I have a dress shop on my books and they do indeed write down the stock at an alarming percentage. When I queried it, the lady said that it was indeed the lower of cost and net resaleable value, and that the resaleable value was indeed very low for past-season stock.

Monsoon

JodieR wrote: »

Thanks, I know I'm probably thinking about this too much, but they do hold a lot of very old stock and it is a material figure in the accounts so I really do want to try to get it as accurate as possible.
Say, for example, they've got 5 of a certain summer dress in stock which were purchased at £100 each 3 years ago, and at the year end were on sale at £40 each. However they only expect to sell maybe 2 of these dresses in the next few months and then plan to reduce the remaining stock to £5 each to clear them. Should they then be valued at £200 (5 x £40), or £95 (2 x £40 plus 3 x £5)? I think that's what I need to get to the bottom of here!

If it's a pretty accurate assessment, backed up by historical sales, I'd go for the £95. You want the best deal for your client, and as long as you can justify it (which it sounds like she can) then go for it.

JodieR

Thanks very much - I feel better about the situation now!