Vauling Stock Samples

JodieR

I'm doing the accounts for a bridal shop. They purchase a lot of sample dresses which are not for sale until the design is discontinued, by which time they're usually a little ragged and rarely sell for over £50. Would you still value the newer dresses at cost price in the accounts?

PGM

Whats cost price?

If they rarely sell for over £50, should they be valued at an average for this type of stock, ie £40 (assuming that this is the lower of cost or NRV)

JodieR

Cost price can be anywhere from £250 up to about £800 each, and generally hang on the racks for 3-5 years before being sold.

groundy

The stock should be valued at the net realisable value if lower than cost.

JodieR

I know that that's the general rule, but say you've got a dress which cost £500 (RRP £1000)and was purchased 2 months before the end of the financial year. It's been tried on a few times but is in pretty good nick. It COULD sell now for say £900 but it WON'T be sold until 5 years later, and then for £50. Most of the guidance I'm reading talks about valuing stock 'which you purchase to sell' and so I guess what I'm asking is whether samples should be included in these rules as they're not purchased for sale, they're purchased to help the customer decide what to buy and then sometimes sold for a negligible value at the end of their useful life.

PGM

So you'd value it at cost, £500 when new.

At the end of the 5th year it'll be valued at the NRV about £50.

I'd pro rata its value from £500 to the £50 over its 5 year expected life.

JodieR

Thanks - that's how I have done it in the past so it's a comfort to know that it's not all wrong, but I have also asked my cousin who's recently passed her ACCA and works as an auditor and she said that you can either do it that way or you can write off samples completely in the year they're purchased, either way is fine.

Monsoon

If it's definitely not going to be sold for 5 years, then its resale value is £50, and that is lower than cost, so I would value it at £50. If there is a chance that it may get sold before the 5 years, then I would do what PGM suggests.

PGM

Monsoon wrote: »

If it's definitely not going to be sold for 5 years, then its resale value is £50, and that is lower than cost, so I would value it at £50. If there is a chance that it may get sold before the 5 years, then I would do what PGM suggests.

Is that right? With the lower of cost / NRV, I work off the current NRV.

JodieR

It is a tricky one - I've been asking the client 'If you sold your business as a going concern today what would you get for that dress?' and she's saying that it's very unusual for bridal shops to be sold as a going concern as it's not that hard to start up a new one. She's heard of shops which have closed down and sold bulk loads of samples for under £1k so they do seem to loose their value pretty quickly. I've always tried to be prudent and valued the dresses at their cost price until they've got a reduced price tag on them, but I do see her point that that may be over-valuing them. I guess it'll vary between trades and individual businesses, but there doesn't seem to be many guidelines on reaching a decision.

Monsoon

PGM wrote: »

Is that right? With the lower of cost / NRV, I work off the current NRV.

I see your point. I was applying the logic that as it was not going to be be sold yet, it has no resale value because it is not stock, it's display. I wouldn't value display items as stock. On that logic, my previous valuation of £50 doesn't work either though!

PGM

Monsoon wrote: »

I see your point. I was applying the logic that as it was not going to be be sold yet, it has no resale value because it is not stock, it's display. I wouldn't value display items as stock. On that logic, my previous valuation of £50 doesn't work either though!

Could you capitalise, and depreciate the display stock?

That would solve the problem.

JodieR

PGM wrote: »

Could you capitalise, and depreciate the display stock?

That would solve the problem.

You could I guess, but I wouldn't for 3 reasons:

a - it's too 'bitty' - would be a bit of a hassle recording all of the relevant information
b - Fashion is a fickle beast - I'm saying that the dresses have a 'life' of 3-5 years but you never really know when a line is going to be discontinued, it's not like buying a car or a computer which you can reasonably estimate how long it'll last.
c - Is it ever correct to show stock items (albeit samples) as a fixed asset? maybe it is? seems a bit strange though.

Monsoon

I'd say no to c. Even though it's display, its still stock.

I guess the "writing down NRV" each year on the stock take is the most accurate approach, but I'd try to value it as low as possible as that sounds realistic.

PGM

Monsoon wrote: »

I'd say no to c. Even though it's display, its still stock.

I guess the "writing down NRV" each year on the stock take is the most accurate approach, but I'd try to value it as low as possible as that sounds realistic.

I love threads like this, just when you think you have the priciples sorted in your mind, it gives you a headache

I can't decide between asset or stock now... I feel like it should be more display asset than stock, could you have a "Sample dress" asset pool where they are transfered to and depreciate it in one lot, at say 30%?

JodieR

PGM wrote: »

I love threads like this, just when you think you have the priciples sorted in your mind, it gives you a headache

Great when they're other people's problems aren't they?! haha no, it is interesting to hear everyone's views on it, thank you all for your inputs. Just wish I'd spelled 'Valuing' right in the title.

deanshepherd

I would say it is not stock at all. It is an asset.

Capitalise it and depreciate it.

It is exactly like buying a computer and getting £50 for it 2 or 3 years down the line.

JodieR

deanshepherd wrote: »

I would say it is not stock at all. It is an asset.

Capitalise it and depreciate it.

It is exactly like buying a computer and getting £50 for it 2 or 3 years down the line.

So if I were to do it this way would the eventual sales not be recorded as turnover? would it instead end up on the P&L as a profit or loss on sale of asset?

deanshepherd

JodieR wrote: »

..would it instead end up on the P&L as a profit or loss on sale of asset?

Yes.