9: Stock

Question 1

Stock should be valued at the lower of:

Answer 1

• Cost

- Net realisable value

Question 2

What is the definition of Net realisable value?

Answer 2

NRV = Selling price - costs to complete and sell

Question 3

What are the three ways to value our closing stock?

Answer 3

• FIFO (First In First Out)
• Average cost
• Weighted average cost

Question 4

What defines gross profit margin?

Answer 4

Gross profit/ revenue

Question 5

What defines markup?

Answer 5

Gross profit / cost of goods sold

Question 6

Revenue recognition for service businesses: If work spans over 1 accounting period, how do we recognise revenue? (2)

Answer 6

• We recognise work done based on stage of completion of contract, if reliable, we can measure revenue and costs.
• If the contract is not reliable, we can only recognise revenue to the extent we have recognised expenses.

Question 7

What is the double entry to account for closing stock?

Answer 7

Dr Stock (in B/S)
Cr PnL (Closing stock in COGS)

Question 8

What are the double entries to account for opening stock in the next period?

Answer 8

Cr Stock (in B/S to remove last period's stock)
Dr PnL (Opening stock in COGS)

Question 9

What are two things to remember when calculating weighted average cost?

Answer 9

• Always find the WAC after purchase and sale of stock

- When goods are sold for £X, this is NOT the purchase price!