Basic Rules: Inventory Valuation

Question 1

What valuation methods are permitted?

Answer 1

1. Market or Lower of cost or market
2. Specific identification
3. First in, first out

Question 2

How may market price be interpreted?

Answer 2

1. current purchase price (used for raw materials;
2. realization value (selling price of goods less direct costs of making the sale - useful for finished goods)
3. replacement value (cost of reproducing the article into its present state of completion; useful for semi-finished goods where it is not possible to obtain a purchase price and it is not possible to sell the article.)

Question 3

Explain the adjustments required for amortization allocation to inventory: Absoption Accouning

Answer 3

• If closing inventory includes an allocation by use of absoption costing of amortization, obsolenscence, or depletion write-offs, the allocation must be added back to income for year.
• The add-back is required even if the amortization is not charged as an expense because the amortization decreases the value of the ending inventory and thereby increases the cost of goods sold and consequently reduces the gross profit and tax payable.
• The amount of allocation that is added back must be deducted from income in the following year because the opening inventory for financial accounting purposes will include the allocation