Back

Valuation of Inventory | O Level Accounting 7707 & IGCSE Accounting 0452 | Detailed Free Notes To Score An A Star (A*)

Views 0
  • Cost is the amount for which an inventory was purchased
  • Net realizable value is the amount for which the inventory will sell today.
  • When doing inventory valuation, we select the lower of cost and net realizable value.
  • The reasons net realizable value may be lower than cost is that the product may have become old and obsolete, it may have become damaged or no longer be in demand
  • Cost = Purchase Price + all related costs
  • Net Realizable Value = Selling price – all costs that occur with sales
  • Three main ways of inventory valuation
    • First In First Out (FIFO)
      • It means that the inventory purchased first, will be sold first as well.
    • Last In First Out (LIFO)
      • It means that the inventory purchased most recently will be sold first.
    • AVCO
      • Average Cost of Inventory Method
      • The method in which we take average cost for all the inventory every time any new inventory is purchased
      • When we sell, we consider the average cost to be deducted from the total inventory value.
  • Remember closing inventory is considered after the accounting year ends to determine which inventory has been left.
  • Inventory statement can be both forward and backward.
    • Forward statement considers the inventory cost at the start of the period. We add all the purchased inventory, we subtract all the sold inventory, we add sales returns, we subtract sales returns and then we find the final inventory, we add the gods that are sent on sales or return basis, we subtract any drawings, we reduce any damaged inventory
    • Backward statement is where you start at the closing date, you add all the sales and purchase returns, you subtract all the purchases and sales returns, we add goods sent on sales or return basis, we minus any goods purchased on purchase or return basis. We less any drawings as well.
  • Incorrect valuation
    • If we overvalue opening inventory, it will reduce gross profit, reduce net profit, over state assets and over state equity
    • If we undervalue opening inventory, the opposite will happen
    • If we overvalue closing inventory, our cost of goods sold will reduce, our gross and net profit will be overstated and the equity and asset valuation will be overstated as well
    • If we undervalue closing inventory, the opposite will happen
Hunain Zia

Hunain Zia has previously achieved considerable success in the high-school educational stream, gaining a massive 154 Total A Grades and 7 Major Distinctions, a process in which he broke/ set 11 different world records, including the most A grades ever achieved, most subjects ever appeared in, most distinctions, gaining distinctions across two separate boards (Pearson Edexcel and CAIE) within the same year/ ever, and even 19 hours of constant examination. All records stand intact today. Hunain pursued his Honors Accounting Degree from the prestigious Bentley University, and then completed an LLB (in Honors) from University of London. Currently, he manages multiple social and commercial projects, has founded digital streams and works tirelessly in the education sector.

Educate A Change focuses on truly bringing change in the educational sector worldwide. All our courses are designed to ensure success, and provide complete preparation without requiring any other external material. Therefore, it takes away the expense of academies, books, past paper compilations and other miscellaneous items. Instead, by just the courses we offer, the student can prepare fully for the best grades in their CAIEs, Edexcel and other high-school exams. The earnings from our course-sales are invested in social projects and growing the free educational activities of Educate A Change.