Reporting inventories

Question 1

Why might the market price of inventory be less than the cost price?

Answer 1

Obsolescence, damage or demand

Question 2

What is the problem with being conservative and reporting inventory at its lowest value?

Answer 2

The information may not be reliable, contradicting the framework, however the accounting standards take precedence.

Question 3

How do we determine cost of purchase?

Answer 3

• Purchase price
• PLUS: import duties and other taxes
• Inward transport costs
• Any other directly attributable costs of acquisition
• LESS: trade discounts, rebates and other similar items

ONLY IF MATERIAL

Question 4

When is an item material?

Answer 4

The Framework says that an item is material if its omission or misstatement is likely to influence economic decisions. For guidance, if an item is over 10% of the INVOICE price, it influences economic decisions and is therefore material.

Question 5

How do we calculate NRV?

Answer 5

Estimated selling price - cost to sell

Question 6

What are the 6 steps of valuing inventory?

Answer 6

1. Identify costs which ‘attach’ to inventory, AND DISCUSS MATERIALITY
2. Select a cost flow method for each product if required
3. Determine cost for each product, on the basis chosen
4. Determine NRV for each product
5. Compare cost and NRV for each product and select a lower value
6. Sum values obtained = inventory at end (at lower of cost and NRV), record (as required), in journal and ledger.