Chapter 20 Valuation of stock

Q1 The concept of prudence requires profit to be stated on a realistic basis. In particular, profit should not be
overstated. Similarly, the assets should not be overvalued in the Balance Sheet.
SSAP 9 requires stock to be valued at the lower of cost and net realisable value. This can have the effect
of increasing rather than decreasing the cost of sales in the Trading Account, thus stating profit on a
conservative basis.
However, some element of subjectivity is involved in determining cost. It involves a choice between
FIFO, LIFO and AVCO, each of which makes an assumption about the order in which stock is utilised
and will produce different results. Some subjectivity may also be involved in determining net realisable
value.

Q2 Janice Jersey

Workings: Purchases: 280 at $65 = $18 200

100 at $69 = $ 6 900
220 at $72 = $15 840 $40 940
Sales: 140 at $82 = $11 480
190 at $85 = $16 150
200 at $90 = $18 000 $45 630

(a) FIFO $ $
Sales 45 630
Cost of sales Closing stock:
Purchases 40 940 Units purchased 600
Closing stock 5 040* 35 900 Units sold 530
Gross profit 9 730 Balance 70 at $72 = $5040

(b) LIFO
Month January March May
Price ($) $65 $69 $72
Quantity 280 100 220
Sales
February (140)
140
April (90) (100)
50
June (200)
20
Cost $3250 $1440 Total $4690

$ $
Sales 45 630
Cost of sales
Purchases 40 940
Closing stock 4 690 36 250
Gross profit 9 380
(c) AVCO Month Quantity Price ($) Average price ($) $
January 280 65 65 18 200
February (140) (9 100)
140 9 100
March 100 69 6 900
240 66.667 16 000
April (190) (12 667)
50 3 333
May 220 72 15 840
270 71.011 19 173
June ( 200) (14 202)
70 4 971
$
Sales 45 630
Cost of sales
Purchases 40 940
Closing stock 4 971 35 969
Gross profit 9 661

Q3 Achmed

Calculation of correct value of closing stock at 31 March 2001

Decrease Increase
$ $ $
Stock before correction 92 050
Goods sent on approval at cost price (1040 0.75) 780
Goods received after 31 March 9 400
$
Sales made after 31 March 18 760
Less Overcharge (160)
18 600
Sales on special offer (6 000)
Damaged goods (2 800)
9 800
Less Profit margin 25% (2 450)
7 350
Add Sales on special offer at cost 5 400
Damaged goods at cost 2 500 15 250
9 400 16 030
Net increase 6 630
Corrected stock 98 680