9 - Stock

Question 1

How do FRS 102 and International accounting standards refer to stock?

Answer 1

inventories

Question 2

From FRS 102, how is stock valued?

Answer 2

the lower of:
* cost
* estimated selling price less costs to complete and sell (net realisable value, NRV)

Question 3

How to calculate net realisable value?

Answer 3

expected selling price less all further costs to completion, less selling and distribution costs

Question 4

Mrs James has 30 units in stock at 31 December that cost £40 each. She hopes to sell them for £52 each but will incur further labour costs of £10 and delivery costs of £6 per unit. At what amount should the stock be valued?

Answer 4

total cost = £1,200
anticipated sales revenue = £52 each, less labour cost (£10) less delivery (£6) = £36, x 30 = £1,080
valued at the lower of these two values

Question 5

What are the three methods of determining the cost of closing stock?

Answer 5

1. FIFO - assumes oldest stock sold first and newest stock kept on shelves (stock always fresh, i.e. baker)
2. average cost method - average purchase price over period of time and allocates this to closing stock
3. weighted average cost method - weighted average purchase price, calculated after each purchase and sale

affects gross profit though (sales - cost of sales (purchases + closing stock) ) as the closing stock value is different for each

Question 6

Miss Wilson buys 200 gnomes for £3 each on 10 March and 400 gnomes for £4 each on 16 March. She sells 100 gnomes for £6.50 each on 13 March and 450 gnomes for £7 each on 20 March. What is her closing stock value of gnomes under the FIFO method?

Answer 6

50 units at £4 so £200 value of closing stock

Question 7

Miss Wilson buys 200 gnomes for £3 each on 10 March and 400 gnomes for £4 each on 16 March. She sells 100 gnomes for £6.50 each on 13 March and 450 gnomes for £7 each on 20 March. What is her closing stock value of gnomes under the average cost method?

Answer 7

total cost = £2,200
average price = £3.67 each

Question 8

Miss Wilson buys 200 gnomes for £3 each on 10 March and 400 gnomes for £4 each on 16 March. She sells 100 gnomes for £6.50 each on 13 March and 450 gnomes for £7 each on 20 March. What is her closing stock value of gnomes under the weighted average method?

Answer 8

recalculate after each purchase and sale
closing stock figure is £190

Question 9

Which two methods can be used to value stock?

Answer 9

1. physical stock count at year end and each type of article held valued at most recent paid price or some other suitable and acceptable price
2. stores ledger system which records, for each type of unit held, the quantities in, out and remaining and the cost of those units

Question 10

How do you account for closing stock in the accounts?

Answer 10

• set up balance sheet asset account for ‘stock’ at end of AP
• debit stock asset a/c and credit P&L a/c with value of closing stock thus reducing cost of sales in P&L a/c by value of unsold closing stock
• carry down balance on stock asset a/c. This is the stock figure that appears in the BS at end of AP

Question 11

How do you account for opening stock in the accounts?

Answer 11

at next AP end:
* credit stock a/c to remove last AP’s closing stock and debit the P&L a/c to increase cost of sales expense
* transfer to P&L a/c (debit) will represent opening stock of period which has been sold in this AP

Question 12

According to FRS 102 Section 23, when should revenue be recognised?

Answer 12

When it is received or receivable

Question 12

According to FRS 102 Section 23, when should revenue be recognised?

Answer 12

When it is received or receivable

Question 13

From FRS 102 Section 23, how do you treat a service contract that spans more than one accounting period?

Answer 13

Sale income builds up over life of the service contract, rather than when work completed or client invoiced. Businesses need to recognise the value of work done under service contract as sales income in its P&L a/c based on stage of completion of contract

Provided revenue, costs and stage of completion can be reliably measured, and probable revenue will be received accounts will recognise sales value of work done to date, and show related cost as an expense in the same period

Where outcome can’t be estimated reliably, revenue should be recognised only to extent of expenses recognised that are recoverable from customer

Question 14

Charlie runs an IT consultancy business and prepares accounts to 31 December each year. At 31 December 2024, Charlie’s business is part way through working on a project for a client. 100 hours have been spent on project at year end and Charlie estimates the project will take a further 200 hours to complete. The quoted fee for the project is £30,000.

Answer 14

Charlie will account for £10,000 (100/(100+200) x £30,000) as sales income and debtors in the year end 31 December 2024 and costs associated with the 100 hours spent on project in year will be expensed to P&L a/c

Question 15

How much revenue should be recognised on unfinished service contracts?

Answer 15

Depends on nature of service. Can spread cost over estimated number of hours service would take, but there’s no rule. Should reflect uncertainties as to the amount the customer will accept and pay

Question 16

John is a tax accountant with a 30 June year end. He is half way through completing Sam’s tax return at the end of June. Sam will pay £1,000 for the completed tax return. Should John accrue the right to 50% of the £1,000 consideration that Sam has agreed to pay for the completed tax return?

Answer 16

Half completed tax return has little practical use, but working under the assumption the contract will progress to completion, so will recognise half the value

FRS 102 requires that, where the outcome of the contract can be estimated reliably, revenue is ascertained in a manner appropriate to the stage of completion. Therefore, should recognise the revenue for half of the completed tax return. Not necessarily on a time incurred basis

Question 16

John is a tax accountant with a 30 June year end. He is half way through completing Sam’s tax return at the end of June. Sam will pay £1,000 for the completed tax return. Should John accrue the right to 50% of the £1,000 consideration that Sam has agreed to pay for the completed tax return?

Answer 16

Half completed tax return has little practical use, but working under the assumption the contract will progress to completion, so will recognise half the value

FRS 102 requires that, where the outcome of the contract can be estimated reliably, revenue is ascertained in a manner appropriate to the stage of completion. Therefore, should recognise the revenue for half of the completed tax return. Not necessarily on a time incurred basis

Question 17

A barrister works on a legal aid case. The legal aid is not settled until long after the case has been settled. How should the revenue be recognised?

Answer 17

Professional judgement, depends on degree of uncertainty. If reasonable estimate can be made of revenue that has been earned from work done to date, that should be recognised. Prudence should be built into estimate for uncertainty.