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The valuation of inventory

The valuation of inventory. Inventory at 31 December. First In, First Out method. Last In, First Out method. AVerage COst method. * (10 x 30 =300) + (10 x 34 =340)=640 640/20=32 ** (12 x 32 =384) + (20 X 40 =800)=1184 1184/32=37. Inventory valuation and the calculation of profits.

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The valuation of inventory

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  1. The valuation of inventory

  2. Inventory at 31 December

  3. First In, First Out method

  4. Last In, First Out method

  5. AVerage COst method * (10 x 30 =300) + (10 x 34 =340)=640 640/20=32 ** (12 x 32 =384) + (20 X 40 =800)=1184 1184/32=37

  6. Inventory valuation and the calculation of profits

  7. Reduction to net realisable value Saleable value - Expenses needed before sales (e.g. what it can be sold for) (e.g. costs of delivery) For example…

  8. Assume that an art dealer has bought only two paintings during the financial year ended 31 December 2011. She started off the year ith out any inventory, and then buys a genuine masterpiece for 6000 and sells it later in the year for 11500. The other is a fake, but she does not realise this when she buys it for 5100. During the year she discovers that she made a terrible mistake and that its net realisable value is only 100. The fake remains unsold at the end of the year. (a)= inventory is valued at cost (b)= inventory is valued at net relisable value

  9. Inventory groups and valuation (1) The category method-the same sort of items are put together in categories. Category Cost Net realisable value A 100+120+300=520 80+150+400=630 B 180+150+260=590 170+130+210=510 C 410+360+420=1190 540+410+310=1260 In this method, it uses the lowest cost as the total: Category A: 520 or 630 =520 B: 590 or 510 =510 C: 1190 or 1260 =1190 Inventory is valued for financial statement at =2220 (2) The item method-the lower of cost or net realisable value for each item is compared and the lowest figure taken. Item Valuation 1 80 2 120 3 300 4 170 5 130 6 210 7 410 8 360 9 310 =2090

  10. Tasks: (1) From the following figures calculate the closing inventory-in-trade that would be shown using (a) FIFO, (b) LIFO, (c) ACVO method. (a)

  11. *(200 x 20=4000) + (100 x 22=2200) =6200 6200/300=20.67 (b) (c) *(200 x 20=4000) + (100 x 22=2200) =6200 6200/300=20.67

  12. (2) For question 1, draw up a tarading account part of the income statement for the year showing the gross profits that would have been reported using (a) FIFO, (b) LIFO, (c) AVCO method.

  13. Answer: (1a) (1b)

  14. *(200 x 20=4000) + (100 x 22=2200) =6200 6200/300=20.67 (1c) *(200 x 20=4000) + (100 x 22=2200) =6200 6200/300=20.67 (2)

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