We received an email from our blog reader with respect to the valuation of inventory.
Should inventory be valued at
(I) Lower of cost or Net Realizable Value
or
(II) Lower of cost and Net Realizable Value
What is your answer then ? (I) or (II)?
Let's explain the question by using a sample, assuming Mobile phone distributor bought 10 pcs of iPhone at USD $ 150, and the selling price per pcs are USD $ 200. Should the inventory valued at USD $ 150 per pcs or USD $ 200 per pcs?
Before answering the questions, let's find out the meaning of 'Net Realizable Value'. 'Net Relizable Value' represents the amount 'realized'/ 'received' in an open market upon selling the goods. Hence, it is the selling price of the goods.
In this case, note (II) appears to be in conflict, as we can't valued the cost at USD $150 AND USD $ 200 at the same time. However, we should valued the iPhone at lower of cost or net realizable value, which is USD $ 150 per pcs.
Wednesday, August 27, 2008
Tuesday, August 26, 2008
#43- Trade Creditors confirmation
We received a questions from our blog reader with respect to the trade creditors' confirmation, as the following:
"... I realised one of my client have many creditors. And most balances are very healthy with 0 balance at year end. Their transactions is quite material ranging from RM300,000 to RM500,000 mostly. Do I need to send confirmations to these 0 balances too or just pick randomly. Thanks lots! :).."
The purpose of sending trade creditors confirmation is to obtain external evidence that the risk of liabilities not recorded are minimal. Although all the trade creditors might appear to be material, some of the balances might be made up of one single transactions and the volume of trading might be low.
Hence, to answer your queries, trade creditors confirmation should be sent to 'Major' trade creditors, with whom the Company has high volume of transactions. Amount might be immaterial as at the balance sheet date, due to recent repayment before year end. However, the risk of liabilities not recorded are usually associated with trade creditors, with whom the Company has high volume of transactions.
Besides, you could rely on statement of accounts forwarded from suppliers as an external evidence.
"... I realised one of my client have many creditors. And most balances are very healthy with 0 balance at year end. Their transactions is quite material ranging from RM300,000 to RM500,000 mostly. Do I need to send confirmations to these 0 balances too or just pick randomly. Thanks lots! :).."
The purpose of sending trade creditors confirmation is to obtain external evidence that the risk of liabilities not recorded are minimal. Although all the trade creditors might appear to be material, some of the balances might be made up of one single transactions and the volume of trading might be low.
Hence, to answer your queries, trade creditors confirmation should be sent to 'Major' trade creditors, with whom the Company has high volume of transactions. Amount might be immaterial as at the balance sheet date, due to recent repayment before year end. However, the risk of liabilities not recorded are usually associated with trade creditors, with whom the Company has high volume of transactions.
Besides, you could rely on statement of accounts forwarded from suppliers as an external evidence.
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