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Stock

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Stock

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  1. Stock

  2. Definition • Assets held for the ordinary cause of the business • In the process of production for such sale • In the form of materials or supplies to be consumed in production process or in the rendering of services

  3. Examples of stock • Goods purchased and held for resale such as merchandise and land/other property • Finished goods or work-in-progress being produced • Cost of services(as for case of service provider)

  4. Examples of costs excluded from the cost of inventories • Should be recognized as expenses • Abnormal amounts of wasted materials, labour or other production costs • Storage costs, unless those costs are necessary in the production process prior to a further production stage • Administrative overheads that do not contribute to bringing inventories to their present location ad condition • Selling costs

  5. Bases for valuation • Historical cost ----objective and verifiable • Current replacement cost ----the firm is a going concern • Lower of cost and net realizable value ----stated in HKAS 2

  6. Cost of Inventories Cost of Purchase e.g.purchase price/ import duties/other taxes Cost of Conversions e.g.cost directly related to the units of production Other Costs e.g.cost incurred to bring the inventories to present location and condition

  7. Net Realizable Value • Net Realizable Value is the estimated selling price in the ordinary course of business lessestimated costs of completion and the estimated costs necessary to make the sale. • Estimations are based on: *the most reliable evidence available at the time the estimates are made, including the fluctuations of price or cost occurring after the end of the period *the purpose for which the inventory is held

  8. Methods of Valuation • Special identification • First-in, First-out (FIFO) • Last-in, First-out (LIFO) • Weighed Average (AVCO) Different methods of inventories valuation may effect the trading account

  9. Example • During the year, the following were the purchases and sales of inventory: • Purchases JAN 8units@ $10 MAR 8units@ $12 OCT 15units@ $16 Sales JUN 6units@ $20 DEC 20units@ $25

  10. Past Paper Questions

  11. Commonly asked questions Accounting treatment correct or not? Adjustment of stock value Explanation of Cost/ NRV/ Lower of cost and NRV Change of profits using different valuation methods