Asset Valuation
Inventories (HKSSAP 22)
Valuation of Stock
1
Introduction

Hong Kong statement of Standard accounting
Practice (2.122) – Inventories (i.e. Stock) is to
prescribe the accounting treatment for
inventories
2
Inventories

Inventories are assets:



Held for sale in the ordinary course of business
In the process of production for such sale
In the form of materials or supplies to be
consumed in the production process or in the
rendering of services
3
Classifications of Inventories





Merchandise
Production supplies
Materials
Work in progress
Finished goods
4
Measurement of inventories

HKSSAP 22 stated that inventories should be
measured at the lower of cost and net
realisable value
5
Cost of Inventories

The cost of inventories should comprise:



Cost of purchase
Cost of conversion
Other costs incurred in bringing the inventories to
their present location and condition
6
Cost of Purchase

The costs of purchase of inventories
comprise:





The purchase price
Trade discount, rebates and other similar items
are deducted in determining the costs or
purchase
Import duties
Other taxes
Transport, handling and other costs directly
attributable to the acquisition of finished goods,
materials and services
7
Cost of Conversion

The costs of conversion of inventories include:


Costs directly related to the units of production
(e.g. direct labour)
Fixed/variable production overheads (e.g.
depreciation and maintenance of factory building
and equipment, indirect material
8
Other Costs

Other cost are included:


Cost of inventories that they are incurred in bring
the inventories to their present location and
condition
For instance, include non-production overheads
or the costs of designing products for specific
customers in the cost of inventories
9
Costs excluded from the cost
of inventories

Examples costs excluded from the cost of
inventories and recognised as expenses in
the period in which they are incurred are:




Abnormal amounts of wasted materials, labour or
other production cost
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 and
condition
Selling costs
10
Cost of Inventories of a
Service Provider


The cost of inventories of a service provider
consists of the labour and other costs of
personnel directly engaged in providing the
service, including supervisory personnel, and
attributable overheads
Labour and other costs relating to sales and
general administrative personnel are not
included but are recognised as expenses in
the period in which they are incurred
11
Net Realisable Value (NPV)

Net realisable value is the estimating selling
price in the ordinary course of business less
the estimated (further) costs of completion
and estimated costs necessary to make the
sale (marketing, selling and distribution cost)
12
Example
Articles
1
2
3
4
5
6
Stock at 31 Dec 20XX
Categories
Cost
Hats
$80
Hats
$110
Cloths
$245
Cloths
$360
Shoes
$140
Shoes
$190
$1125
NRV
$85
$90
$320
$400
$105
$170
$1170
Use the following method to value the above stock:
1. Aggregate method
2. Category method
3. Article method
13

Aggregate method



Total value of stock at cost = $1125
Total value of stock at NPV = $1170
Low figure $1125 will be chosen
14

Categories method
Categories Cost
Hats
Cloths
Shoes
NRV
$80+110= $190
$85+90=$175
$245+360=$605
$320+400=$720
$140+190=$330
The lower of cost and NRV:
Hats
$175
Cloths
$605
Shoes
$275
Total
$1055
$105+170=$275
15

Articles method
Article
1
2
3
4
5
6
Lower of cost and NRV
$80
$90
$245
$360
$105
$170
$1050
16

Situations where NRV is lower than cost





An increase in costs or a fall in selling price
Physical deterioration of stock
Obsolescence of stock
A deliberate pricing strategy to sell goods at a low
price
Errors in production or purchasing
17
Recognition as an expense

When inventories are sold, the carrying
amount of those inventories should be
recognized as an expense in the period in
which the related revenue is recognized.
18
Stock Taking Methods


Periodic Inventory
Perpetual Inventory
19
Periodic Inventory

The totals of purchases and issues (sales)
are recorded at the end of each financial
period and the balance of the inventories will
only be calculated at the end of each period
20
Perpetual Inventory

A running balance is maintained to record the
movements of the inventories after every
purchase and issue (sale) of the inventories
21
Methods of inventories valuation




First-in, first-out (FIFO)
Last-in, First-out (LIFO)
Weighted Average Cost (AVCO)
Specific Identification/Unit Cost
22
First-in, First-out (FIFO)



Items of inventory which were purchased first
are sold first
The cost of goods sold is based on the oldest
price
The closing stock is valued at the most recent
price
23
Last-in, First-out (LIFO)



The items of inventory which were purchased
recently are sold first
The cost of goods sold is based upon the
most recent prices
The closing stock is valued at the oldest
prices
24
Weighted Average Cost (AVCO)


The cost of good sold and the closing stock
are valued at the weighted average cost
After each purchase of stock, the average
cost for each item of stock is computed
25
Specific identification



Each item of stock has its own identity and it
is distinguishable from any other unit
The cost of goods sold and closing stock are
determined by associating the units of stock
with their specific unit costs
This method is appropriate for companies
that handle a relatively low volume of highvalue goods such as jewellery and
automobilies
26
Example
27
During the year of 20XX, the following were the purchases and
Sales of Product A:
Receipts
Quantity (kilos) Price per kilo
20XX
January
February
March
May
June
July
August
October
November
100
80
40
50
100
Sales
Quantity (kilos) Price per kilo
2
60
5
80
5
100
6
100
6
2.5
3
3.5
4
Required:
Prepare trading accounts for the year of 20XX showing the gross profit if
Closing stock is valued on each of the following bases:
(a) FIFO
(b) LIFO
(c) AVCO
28
FIFO
29
Date
20XX
January
Received
Qty Price Amt.
100
2
200
February
60
March
80
2.5
200
May
40
3
120
June
July
August
Sold
Balance
Qty Price Amt. Qty Price Amt.
2
120
3.5
2
200
40
2
80
40 2 80
80 2.5 200
40 2 80
40 2.5 100
50
100
175
40 2.5 100
40 3 120
20 3.5 70
40 2
80 2.5
40 3
80
200
120
40
40
2.5
3
100
120
40
40
50
2.5
3
3.5
100
120
175
30
3.5
105
30
Date
20XX
October
November
Received
Qty Price Amt.
100
4
Sold
Balance
Qty Price Amt. Qty Price Amt.
400
30 3.5
100 4
30
70
3.5 105
4 250
30
4
105
400
120
Therefore, closing stock: 30 kilos X $4 = $120
31
LIFO
32
Date
20XX
January
Received
Qty Price Amt.
100
2
200
February
60
March
80
2.5
200
May
40
3
120
June
July
August
Sold
Balance
Qty Price Amt. Qty Price Amt.
2
120
3.5
2
200
40
2
80
40 2 80
80 2.5 200
40 2
80 2.5
40 3
40 3 120
40 2.5 100
50
100
175
40
40
2 80
2.5 100
40
2
40 2.5
50 3.5
50 3.5
40 2.5
10 2
175
100
20
30
80
200
120
2
80
100
175
60
33
Date
20XX
October
November
Received
Qty Price Amt.
100
4
Sold
Balance
Qty Price Amt. Qty Price Amt.
400
100
4
400
30
100
2
4
60
400
30
2
60
Therefore, closing stock: 30 kilos X $2 = $60
34
AVCO
35
Date
20XX
January
Received
Sold
Balance
Qty Price Amt. Qty Price Amt. Qty Price Amt.
100
2
200
February
60
March
80
2.5
200
May
40
3
120
June
July
August
3.5
120
2
200
40
2
80
40 2 80
80 2.5 200
120 2.33 280
120
40
160
80
50
2
100
2.5
200
175
80
80
50
130
100
2.88 288
30
2.33 280
3
120
2.5 400
2.5
200
2.5 200
3.5 175
3.75 487
2.88
87
36
Date
20XX
October
November
Received
Qty Price Amt.
100
4
Sold
Balance
Qty Price Amt. Qty Price Amt.
400
30 2.88 87
100 4 400
130 3.75 487
100
3.75 374
30
3.75
113
Therefore, closing stock: 30 kilos X $3.75 = $113
37
Trading account for the year of 20XX
FIFO
LIFO
AVCO
$
$
$
$
$
$
Sales
(140*$5+200*$6)
1900
1900
1900
Less:COCS
Purchases 1095
1095
1095
Less: Closing
Stock 120 975 60
1035 113 982
925
865
918
38
Comparison of three methods




There is a need for an organization to be consistent
in its issue pricing methods
Because of SSAP recommendations and the Inland
Revenue, the use of the FIFO or the average price
system appear to be most common.
The LIFO system is generally not acceptable to the
Inland and is not recommended by SSAP
Because of rising prices LIFO, by keeping down
disclosed profits, paying less taxation, provides a
hedge against inflation
39
Goods on sales or return
40
Goods received on sale or return



Our firm do not have to pay for the goods
until we sell them
If our firm do sell them, we return them to our
supplier
The goods do not belong to us, so the goods
on sale or return at the stocktaking date, they
should not be included in our stock valuation
41
Goods sent on sale or return


The customer do not pay for the goods until
they confirm to buy. If they do not buy, those
goods will return to us
Goods on the ‘sale or return’ basis will not be
treated as normal sales and should be
included in the closing stock unless the sales
have been confirmed by customer
42
Stock
&
the Balance Sheet Date
43
Why occurs?




All the counting and valuation of stock is
done on the last day of the accounting period
But it is difficult for large business to count it
since there may be too many items of stock
The stocktaking may take place over a period
of days
To get the figure of the stock valuation as on
the last day of the accounting period,
adjustment should be made
44
Example
45




ABC Ltd. has a financial year which ends on 31 December 20XX.
The stocktaking is not in fact done until 8 January 20XX.
It is found that the stock value amounted to $28850 on 8 January
20XX.
The following information is available about transactions between
31 December 20XX and 8 January 20XX:
 Purchases since 31 December 20XX amounted to $2370 at cost
 Returns inwards since 31 December 20XX were $350 at selling
price
 Sales since 31 December 20XX amounted to $3800 at selling
price
 The selling price is always cost price + 25%
What is the stock value 31 December 20XX?
46
ABC Ltd.
Computation of stock as at 31 Dec 20XX
$
Stock at 1 Jan 20XX (at cost)
Add: Sales (3800-3800*25/125)
Less: Returns inwards (350-350*25/125)
Purchases (at cost)
Stock in hand as at 31 Dec 20XX
$
28850
3040
31890
280
2370
2650
29240
47