The inventories control
Question 1
The inventories control account balance of St George Fashions at 30 June 2023 was $110 510 using the perpetual method. A physical count conducted on that day found inventories on hand worth $110 100. Net realisable value for each inventories item held for sale exceeded cost. An investigation of the discrepancy revealed the following.
Goods worth $3300 held on consignment for Rockhampton Accessories had been included in the physical count.
Goods costing $600 were purchased on credit from Springbrook Ltd on 27 June 2023 on FOB shipping terms. The goods were shipped on 28 June 2023 but, as they had not arrived by 30 June 2023, were not included in the physical count. The purchase invoice was received and processed on 30 June 2023.
Goods costing $1200 were sold on credit to Noosa Pty Ltd for $1950 on 28 June 2023 on FOB destination terms. The goods were still in transit on 30 June 2023. The sales invoice was raised and processed on 29 June 2023.
Goods costing $1365 were purchased on credit (FOB destination) from Launceston Handbags on 28 June 2023. The goods were received on 29 June 2023 and included in the physical count. The purchase invoice was received on 2 July 2023.
On 30 June 2023, St George Fashions sold goods costing $3150 on credit (FOB shipping) terms to Kurnell’s Boutique for $4800. The goods were dispatched from the warehouse on 30 June 2023 but the sales invoice had not been raised at that date.
Damaged inventories valued at $1325 were discovered during the physical count. These items were still recorded on 30 June 2023 but were omitted from the physical count records pending their write-off.
Required
Prepare a schedule with two columns one for ‘Control account balance’ and another for ‘Physical count’. Add or subtract the relevant inventory items to arrive at a closing balance for inventory in each column (Hint: the final balance in each column should agree).
Prepare any
2.i) What does the term ‘net realisable value’ mean? What sources of evidence could a company use to determine net realisable value?
2. ii) Identify three reasons why net realisable value may fall below cost. What action should a company take at year end if some of its inventory items have declined in value while other inventory items have increased in value? Why?
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