Help!

[TyErd]

Can someone help me with 2.2 2.3 and 2.4 please.

[_avO]

2.1. value of stock =  $22,000

2.2. Only 1 line of stock is being affected by the write down of stock to Net Realisable Value which are the footballs. What you do is use the rule
NRV = QTY x (Estimated selling price less other selling expenses)
      = 60 x (45)
      = 2,700
add the other 3 stock balances (without using the NRV as the estimated selling price is higher than cost price)
2,700 + (100x45) + (200x66) + (100x10)
2,700 + 4,500 + 13,200 + 1,000
= $21,400

2.3. By lowering the cost and NRV, you are causing assets to reduce by its write down value (Value of stock on hand less value of stock after NRV)
22,000 - 21,400 = 600

GJ Entry: DR stock write down    600
                   CR Stock control        600
Therefore the two-fold effect is that assets decrease by 600 (stock control) and OE decreases by 600 (Expense up by 600 causing Net profit to decrease by 600)

2.4. Conservatism / relevance
Losses should be recorded when probable and as a result of (low demand, deterioration etc) the business has reduced the value of stock which may result in the likelihood of a loss. It ensures decision making.. etc.

[TyErd]

Thankyou so much mate, very clear as well

[_avO]

No problem, I learn too from doing this xD its good revision

[TyErd]

can I have some help with these questions too please

[_avO]

3.1. You only use the RRP when there is a sale and is needed to be recorded in the stock cards, but it's not used for calculating NRV

Using the rule NRV = QTY x (Estimated selling price less other selling expenses),
Each line of stock has a different estimated selling price, but all uses the 10% commission basis
this 10% commission is the 'other selling expenses' in the rule,
Along with the QTY and Estimated selling price, I think you can answer this question easily \

After doing this, also calculate the value of stock on hand before the NRV is applied (i.e. QTY x Cost price). You can then determine which values are appropriate to use for the next step (i.e. Product no. 34 is the appropriate one)

3.2. Determine the stock write down expense by using the rule
Stock write down exp = Value of stock less Value of stock after NRV
                                                  OR
                              = (QTY x Cost) - (QTY x Estimated Selling Price less Other selling expenses)
Net profit will decrease by the stock write down expense (whatever you get after applying the above rule)

3.3. Use Conservatism and Relevance (the same as the previous question) and you can easily justify that it improves decision making by recording probable losses as opposed to its historical cost

That's all I can help you with, I hope you can do it

[TyErd]

Umm for 3.1 do we have to multiply by the QTY?

[_avO]

Yes multiply by quantity (its finding out balance not individual costs)

[TyErd]

okay thanks again

[TyErd]

Calculate the stock writedown on Large Picture Frames as at 31 October 2010

[_avO]

Total stock on hand is 40 units of picture frames,
Extra selling expenses is 800 dollars (exclude the GST as it is not part of a stock's value)
Using product costing, 800/40 = 20 <--- other selling expenses
It's given that his new selling price is  $230 <-- Estimated selling price

NRV = QTY x (Estimated selling price less other selling expenses)
      = 40 x (230 - 20)
      = 40 x 210
      = 8,400

Stock on hand before NRV = 5,280 + 3,360 = 8,640

Therefore stock write down expense = stock on hand less NRV
                                                 = 8,640 - 8,400
                                                 = $240

[TyErd]

mate you explained that perfectly, thnx heaps!

[_avO]

no worries, gotta go now good luck on your homework

[TyErd]

Does the decision to classify something as a period cost rather than a product cost affect profit?

[_avO]

Yep, it will understate profit assuming all stock is not sold at the end of a period

Eg. delivery in $400
     10 soccer balls 30 dollars each
 
~~~~~~~~~~~~~~~

Using product costs, it is logical to divide 400 amongst 10 balls
400/10 = 40 dollars (additional cost that adds into historical cost)
therefore each ball is 40+30 = $70, stock on hand is 10x70 = $700

Scenario: You sell 6 balls and have 4 balls remaining at the end of the period
6 balls out means that your cost of sales is 6x70 = $420 which will go into your P&L statement under "Cost of goods sold"
the remaining 4 balls are for the next period's stock balance
COGS = Cost of sales
        = $420

~~~~~~~~~~~~~~~

Using period cost, you don't individually divide other expenses relating to stock into the valuation of individual stock
So each ball is worth 30 dollars with an additional fee of $400 delivery

Scenario: You sell 6 balls and have 4 balls remaining at the end of the period
6 balls out means that your cost of sales is 6x30 = $180
However, also note that 400 dollars for delivery is also an expense to the preparation of stock. It therefore needs to go under "Cost of goods sold"
COGS = Cost of sales plus delivery in
         = 180 + 400
         = $580

~~~~~~~~~~~~~~~


You can now see that when applying the period cost method, it will cause expenses to be overstated by $160 and in turn will understate net profit by $160. It is not as relevant as using the product cost method

Hope this helps