Accounting - Application of 'lower of cost' and 'net-realisable value'
Application of 'lower of cost' and 'net-realisable value' (NRV) rule
This rule is applied to individual stock items. It is important that
students can adequately define each of these terms. Below is an example of
an application of that rule.
Complete the following table by calculating value of stock on hand at the
end of the period.
The typing in bold is the solution to this question. Do not forget to
include the total. You may be asked why the net realisable value for
this brand of modem is lower than cost.
reasons may include
later, more technically advanced models are now available
later models are cheaper
there has been a fall in demand for modems
later models have modems already built into computers
reasons for stock loss may include
theft by customers and staff
wastage, obsolescence and items exceeding their use by date
other invoicing, which occurs when a business is charged more for goods than are actually delivered
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