Stock

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

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)

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

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

Cost of Purchase

e.g.purchase price/import duties/other taxes

Cost of Conversionse.g.cost directly

related tothe units of production

Other Costse.g.cost incurred to

bring the inventories to present location

and condition

Cost of Inventories

Net Realizable Value

Net Realizable Value is the estimated selling price in the ordinary course of business less estimated 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

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

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

Trading Account FIFO

LIFO

AVCO

$

$

$

Sales ($20*6 units +$25*20units) 620 620 620

LESS: Cost of goods sold

Opening stock -

- -

Add: purchase 416 416 416

Less: closing 80 50 70

Gross Profit 284 254 274

Past Paper Questions

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