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Chapter 6 Valuation of Inventory
Chapter 6 Valuation of Inventory
Inventory may include finished goods (製成品), work-in-progress (半製成品) or raw materials. (原材料)
The weighted average cost method (WAVCO) is an inventory valuation method by which the cost of inventory
is based on the average cost of goods available for sale during the period. (根據加權平均成本法,存貨的成
本是根據該會計期的可供銷售的平均成本計算的。)
Example 1:
Given the following records of goods purchased and sold during the first year operation of a trading firm:
Purchases Sales
2015 Unit Unit cost 2015 Unit Unit price
Jan 10 $3,000 May 8 $5,000
Apr 10 $3,400 Nov 24 $6,000
Oct 20 $4,000
(a) Calculate the weighted average cost per unit.
(b) Calculate the cost of goods sold.
(c) Calculate the closing inventory.
(a) Weighted average cost per unit = (10 x $3,000) + (10 x $3,400) + (20 x $4,000) / (10 + 10 + 20)
= $144,000 / 40
= $3,600
(b) The closing inventory = [(10 + 10 + 20) – (8 + 24)] x $3,600
= 8 x $3,600
= $28,800
(c) The cost of goods sold = (8 + 24) x $3,600
= $115,200
Net realisable value = Selling price of an item Cost to complete and to sell the item
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According to the lower of cost and net realizable value, the inventory whose net reliable value is lower than
cost should be valued at net realizable value. These inventory items should therefore be written down. ( 按照成
本與可變現淨值孰低法,如果某些貨品的可變現淨值低於成本,這些貨品便應按可變現淨值計價,並須
要減值。)
Example 2:
Suppose a firm has an inventory item that costs $400. It is estimated that this item could be sold for
$300 after deducting the necessary handling charges and carriage.
Since the net realisable value ($300) is lower than the cost ($400), this inventory item should be
valued at net realisable value $300
Example 3:
D Cheung is a clock wholesaler. As at 31 March 2016, the closing inventory was valued at $45,500.
Subsequent investigation of inventory records revealed that a batch of clock priced at $4,200 had been sent to
a customer on a sale or return basis but remained unsold by 31 March 2016. These clock had not been
included in the valuation of closing inventory. A uniform mark-up of 50% was applied throughout the year
ended 31 March 2016.
Required:
Recalculate the correct inventory value as at 31 March 2016.
Cost of inventory sent on sale or return basis = $4,200 / 150%
= $2,800
Inventory as at 31 March 2016 = $45,500 + $2,800
= $48,300
6.5 Deduction of closing inventory after the end of the reporting period (在會計期完結
後計算期末存貨值)
Very often, the value of closing inventory can only be ascertained after the end of the reporting period. As a
result, adjustments are required to work out the actual value of closing inventory at the end of the reporting
period. (很多時候,期末存貨的價值只能在會計期末後確定。所以需要在會計期末調整期末存貨的實際價
值。)
Simple situation
Opening inventory Cost of Sales/Cost of goods sold
Inventory
Purchases Returns outwards
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Cost of returns inwards Closing inventory
Opening inventory + Purchases + Cost of returns inwards = Sales + Returns outwards + Closing inventory
Note: The opening inventory can also be determined by the above relationship. (期初存貨也可以由上述關係
確定)
Example 4:
Lion Ltd's financial year ends on 31 December. On 8 January 2016, the inventory valuation was completed and
the inventory at the year-end was valued at $288,500. The following transactions took place between 1
January 2016 and 8 January 2016:
1 Goods were purchased for $26,700.
2 Goods costing $3,000 were returned to suppliers.
3 Goods were sold for $38,000. All sold goods were marked up by 25%
4 Goods priced at $3,500 were returned by customers.
Complicated situation
Opening inventory Cost of sales
Returns outwards
Purchases Inventory
Loss of stock
Cost of returns inwards Inventory undercast
Inventory overcast Closing inventory
REQUIRED:
Prepare a statement to calculate the closing stock value of Mr Wong’s business as at 31 December 2007.
(B)
Statement to calculate the closing stock value of Mr Wong’s business as at 31 December 2007
$ $
Closing stock value as at 6 January 2008 38,420
Add: (ii) Net sales after year end [($6,880 $5,900) / (1 + 25%)] 784
(iii) Drawings after year end 350
(iii) Discounted sales to staff [($2,000 x 2 / (1 + 25%)] 3,200
(iv) Goods held by customer for inspection 720 5,054
43,474
Less: (i) Damaged goods 100
(ii) Purchased after year end 7,230 7,330
Closing stock value as at 31 December 2007 36,144
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The net balance of the abnormal inventory loss account will be transferred to the profit and loss account at the
end of the accounting period: (非正常存貨損失悵户的淨額會在會計期末轉到損益悵户:)
Dr Profit and loss account
Cr Abnormal inventory loss account
Example 5:
Wilson Wong operates a trading business and has a year-end date of 31 December. On the evening of 5
November 2014, a fire broke out at the warehouse and destroyed part of inventory costing $49,800. The
inventory was insured and the insurance company agreed on 10 December 2014 to make a compensation
payment by cheque equivalent to 60% of the loss. Prepare the journal entries for the inventory loss, insurance
compensation and transferring to profit and loss for the year ended 31 December 2014.
The Journal
Date Details Dr Cr
2014 $ $
Nov 5 Inventory loss 49,800
Purchases 49,800
Dec 10 Bank (49,800 x 60%) 29,880
Inventory loss 29,880
Dec 31 Profit and loss 19,920
Inventory loss (49,800 x 40%) 19,920
Exhibit 6.4
Trial Balance as at 31 March 2015
Dr Cr
$ $
Sales 2,164,000
Purchases 1,460,000
Inventory 310,000
Wages and salaries 172,000
Rent 180,000
Sundry expenses 23,000
Office equipment 400,000
Accumulated depreciation: Office equipment 100,000
Trade receivables 92,800
Trade payables 105,500
Allowance for doubtful accounts 3,500
Capital 402,000
Drawings 60,000
Bank 77,200
2,775,000 2,775,000
Additional information:
1 Inventory as at 31 March 2015 was valued at $280,000
2 An allowance of 5% was to be made for doubtful accounts.
3 Office equipment was to be depreciated at 25% using the straight-line method.
4 Some of the goods in the warehouse were destroyed by a fire on 1 March 2015. It was determined that
inventory loss amounted to $80,000 and half of the loss would be covered by insurance. No entries were made
for this event.
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Less Expenses:
Wages and salaries 172,000
Rent 180,000
Sundry expenses 23,000
Depreciation: Office equipment ($400,000 x 25%) 100,000
Increase in allowance for doubtful accounts [($92,800 x 5%) $3,500] 1,140
Abnormal inventory loss ($80,000 $40,000) 40,000 (516,140)
Net loss 237,860
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