stock valuation- NRV

111111

I have difficulty to understand stock valuation using the cost price and NRV Could any way make it clear for me??

Also in Osbourn CH 9 question 9.4

The business has 500 large ring binders in stock at the financial year.

cost price 2.20 per ring binder
selling price 4.00

they dont sell well so the owner decide to overprint them and sell them to student.

The cost of overprint is 1.00 and the special price is 3.00 for student.

What is the stock valuation for 500 binders in stock on the 30 June 2005.

Sugested answer: 2,000; 1,500; 1100; 1,000.

Have no idea how to make the calculation show the right which is 1,000.

Thank you

SandyHood

Lower of cost or net realisable value
cost £2.20 v Sell for £3.00 less conversion cost £1.00 (NRV = £2.00)

The NRV is lower

500 binders x £2.00 NRV = £1,000

coojee

SandyHood wrote: »

Lower of cost or net realisable value
cost £2.20 v Sell for £3.00 less conversion cost £1.00 (NRV = £2.00)

The NRV is lower

500 binders x £2.00 NRV = £1,000

It doesn't matter how many times I look at this question (and I've looked at it A LOT) I just can't get my head around it. To my mind cost is the original £2.20 plus the £1 conversion cost making a total cost of £3.20 and NRV is £3 so they should be valued at £3.

Ah, unless it's the stock valuation of the binders BEFORE he converts them. I get it then. Is that what it is? If he's already paid the £1 to convert them then I don't get it.

AK002

Nope. NRV is selling price less selling costs.

Net realizable value (NRV) is a method of evaluating an asset's worth when held in inventory, in the field of accounting. NRV is part of the Generally Accepted Accounting Principles and International Financial Reporting Standards (IFRS) that apply to valuing inventory, so as to not overstate or understate the value of inventory goods. Net realizable value is generally equal to the selling price of the inventory goods less the selling costs (completion and disposal). In formula:

SandyHood

Under SSAP 9 the same rule applies

coojee

AK002 wrote: »

Nope. NRV is selling price less selling costs.

Net realizable value (NRV) is a method of evaluating an asset's worth when held in inventory, in the field of accounting. NRV is part of the Generally Accepted Accounting Principles and International Financial Reporting Standards (IFRS) that apply to valuing inventory, so as to not overstate or understate the value of inventory goods. Net realizable value is generally equal to the selling price of the inventory goods less the selling costs (completion and disposal). In formula:

Yes, but if he's already PAID the £1 to convert the binders then it's no longer a selling cost. He's got some items in stock that cost him £2.20 to buy and he's now paid another £1 to convert them making the total cost £3.20 with NRV of £3. However, if he HASN'T converted them then his cost is still £2.20 but now he has a selling price of £3 less £1 conversion cost ie £2. This gives a NRV of £2 v cost of £2.20.
Thinking about the double entry, on the purchase he'd have:
DR COS £2.20
CR Bank/Creditors £2.20
If he now pays the conversion cost before the year end he has entries of:
DR COS £1
CR Bank/Creditors £1
This makes his cost of sales £3.20 for each binder. If you now value the stock of those binders at only £2 you'll be making a loss of £1.20 per binder in this financial year and then when you sell them next year you'll make a profit of £1. This is wrong. The only way it can be right is if he hasn't yet paid the £1 conversion cost. In this year he makes a loss of 20p and next year he makes no profit (receives £3 per binder vs £2 opening valuation + £1 conversion cost).
Therefore the answer hinges on whether or not he's paid the conversion cost and I don't think it's made clear in the question.
Having said all of that, it's unlikely that there'll be a question this ambiguous in the exam.

Bluewednesday

Regardless of whether it makes sense or not, the rules that AK002 has quoted are correct.

NRV may result in the stock valuation being less than the cost of sale but your stock cannot be overstated in value which your method would give.

It is very likely that this will come up in the exam, it is checking whether you can apply the rules or not.

coojee

But that's not what I'm saying. I'm saying if you have already debited cost of sales with the conversion cost then you must include that cost in your stock valuation, thereby making a cost of £3.20 with a NRV of £3, therefore stock should be valued at £3. If you value it at £2 then you're double counting the conversion cost.

I'm not arguing that the answer is wrong in this question, all I'm saying is that it makes a difference whether or not you've already paid the conversion cost and I don't think this particular question makes it clear.

It's semantics really.

Bluewednesday

I think you need to treat your stock valuation and your cost of sales as different items. If you think of your cost of sales calculation the stock value is just the value that is taken off at the end. Any conversion costs are just reducing the gross profit. I don't see how it makes a difference when the conversion cost is paid.

To comply with the accounting standard you need to apply the rules, which is what AAT are testing.

How else do you suggest that valuation in the accounts should be dealt with? If you go with what you are saying surely you are going to have overstated stock value in the accounts?

Am I misunderstanding what you are getting at?

Gem7321

I think you're trying to figure out the double entry of the cost which you don't need to do, this is purely valuation and the double entry will be dr closing stock b/s cr closing stock p&l once you have your valuation figure which will be the less of net realisable value or cost.

Bluewednesday

After a little chat with Steve, I see what you are saying coojee - I hadn't realised what you meant but do now.

For the sake of not confusing students anymore, it looks like they have assumed that the conversion cost hasn't yet happened as SSAP 9 states:

Paragraph 21 SSAP 9

Net realisable value. The actual or estimated selling price (net of trade but before settlement discounts) less:



(a) All further costs to completion; and

(b) All costs to be incurred in marketing, selling and distributing.

Like you say, hopefully it will be a bit clearer in the exams but we were always told to state your assumptions if you are unsure.

coojee

Bluewednesday wrote: »

After a little chat with Steve, I see what you are saying coojee - I hadn't realised what you meant but do now.

For the sake of not confusing students anymore, it looks like they have assumed that the conversion cost hasn't yet happened as SSAP 9 states:

Paragraph 21 SSAP 9

Net realisable value. The actual or estimated selling price (net of trade but before settlement discounts) less:



(a) All further costs to completion; and

(b) All costs to be incurred in marketing, selling and distributing.

Like you say, hopefully it will be a bit clearer in the exams but we were always told to state your assumptions if you are unsure.

Yes, that's exactly what I'm saying but not getting it across very well.

Bluewednesday

To be fair, I think I did so many papers in my AAT days that you knew what they were asking for and didn't look into the depth of the question which is what you did!