ACCOUNTANCY FORM 6 – STOCK VALUATION

ESTIMATING STOCK

When a business firm does not maintain a perpetual inventory system, It has no way of determining the actual stock or inventory on hand unless the physical stock taking is done on a particular date. This will cumbersome and costly if it has to be done several times during an accounting period.

In order to avoid these inconveniences, the business will use an estimated figures its ending inventory.

There are occasions when it is necessary to estimate inventory. For-example when goods are lost or due to theft, a brokerage or natural deterioration or evaporation.

There are two common approaches to estimate stock;

1. Gross profit method
   
2. Retail method
   
3. GROSS PROFIT METHOD
   

 

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This method of estimation uses Gross profit margin or average mark up in order to determine the cost of goods sold (cost of sales).

*Margin = profit/selling price.

* Mark up = profit/cost price.

ILLUSTRATION 1

ABC LTD TRADING A/C FOR THE YEAR ENDED 30/06/2009

Calculate;

1. Gross margin in percentage
   
2. Average mark up in percentage 
   

 

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Solution;

1. Gross profit margin = profit/selling price x 100%
   

   
   

         =     25%
   

 

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ILLUSTRATION 2

Assume in illustration (i.) in the previous page during July, August, September ABC has made;

Purchases                                               240,000

Net sales                                                 350,000

Calculate inventory on 30^th September, use gross profit method to estimate the

Given data;-

Stock as at 30^th/6                                     180,000

Purchases                                                 240,000

Sales                                                       350,’000

Margin                                                         20%

Calculate closing stock.

ILLUSTRATION 3

On 1^st January 2004, J.M valued his stock at cost, 12,300. During the first week of January 2004, his transactions in his stock were as follows;

Purchases                                                8,100

Sales                                                       13,600

Returns inwards                                       800

Returns outwards                                     300

He sells his goods at 25% above cost of goods available for sale.

Calculate the cost of his stock at 7^th January 2004

Gross profit P2?800x
Chane mark-up→Margin
                   25% →20%
20%x12,800→Gross profit Tshs 2560

RETAIL METHOD

• This estimation technique is employed to business with large amount of stocks of relatively low unit’s values.
  
• Usually all items are quoted at retail prices
  

 

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Example of business using retail method is;

1. Large chain store
   
2. Supermarket
   

 

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This method employs the following steps;

1. obtain the cost of goods available for sale
   
2. if sales figure is given taking the value of goods available for sale at retail the sales figure should give the value of closing stock at retail
   
3. the value of closing stock at retail can be converted to an approximate cost figure by using the ratio of cost retail value worked out at (a) above.
   

 

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ILLUSTRATION

On 1^st June;                                                 COST                   RETAIL

Opening stock                                           180,000                   288,000

30^th; purchases                                         145,000                    212,000

30^th; sales                                                       ─                       170,000

Calculate;

1. cost retail ratio
   
2. closing stock at retail value
   
3. Conversion of closing stock at retail value to cost.
   

 

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Solution

Cost to retail ratio

                                                               COST                     RETAIL

Opening stock                                     180,000                  288,000

Add; purchases                                   145,000                  212,000

                                                               325,000                 500,000

Ratio = cost/Retail x 100

         = 325,000 x 100

           500,000

                = 65%

Closing stock at retail value

Conversion of closing stock at retail value to cost

Closing stock = 330,000

65    x 330,000

100

         = 214,000

 Conversion of closing stock = 214,000

WEAKNESS OF ESTIMATION METHOD

1. The stock estimation technique covered has assumed that the gross profit margin is stable in the period of estimation.
   
2. They also assume that closing stock will be representative of all items which were available for sale.
   
3. If these assumptions are not true, then misleading values will be produced.
   
4. These techniques have to take accounts of realities encountered if they are to yield/ to get/to gain acceptable approximation.
   

 

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On 1^st April 2012; Stock at cost was                 30,000/=

                             Purchases           15,000/=

                              Sales                 10,000/=

The normal rate of Gross profit on cost price is 25% however it is known that allowances of 2,000/= have been made to customers.

Calculate;

– Closing stock estimate as at 30^th April 2012.

Exercise 2.

Due to administrative reasons W.mahwa, the wholesaler, had to take his stock on 28^th December 2004, on which date it was valued at cost at 73,260. The following transactions took place in the next 3 days.

1. Sales book                               3400
   
2. Cash sales                               1940
   
3. Purchases book total             2310
   
4. Returns inward book            220
   
5. Returns outward book        170
   
6. Carriage inward                    425
   

 

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A detailed examination of the books also revealed the following information

1. Sales book includes one invoice for 280/= against which goods were delivered on 2^nd January 2005.
   
2. Cash sales includes sales of an item that had a cost value of 42/= but was sold for 36/= as it has been damaged in store
   
3. All purchases made had been dully received from supplier
   
4. A customer returned books that has been invoiced to him at 80/= on 29^th December 2004 but was issued with a credit loan on 3^rd January 2005
   
5. Carriage inward was paid in respect of goods bought in December 2004
   
6. Stock with a cost value of 295/= had stayed in store for too long and estimated to have realizable value of only 178/=.
   
7. Goods costing 126 were returned to a supplier on 30^th December 2004 but the credit note was received four days later.
   
8. No records have been made of drawings in the form of goods by the owner of this business, W. Mahwa of 203.
   
9. The usual gross profit margin is 33% on cost.
   

   Calculate the cost, net realizable value whichever is the lowest of the stock of 31^st December 2004.
   

 

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INSURANCE CLAIM

ILLUSTRATION 1

J.A has insured a stock for 10,000/=. On 31^st March 2008 when the total cost value of stock in his store was 12,000, his store caught fire, the value of stock salvaged from fire was 3,000/=. Calculate the amount he can claim from the insurance company.

NOTES

If stock is not fully insured, that is if the value of stock in store is more than the sum insured, insurance company paid the following portion of the value of stock destroyed from fire

               Insurance claim = 10,000  x 9,000

                                                12,000

                                 Insurance claim = 7,500

• Owner J.A of the go down should claim 7,500 before his insurance company.
  

 

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ILLUSTRATION 2

Stock on 31^st March 2005 (last year end)        6200/=

Debtors on 31^st March 2005 was                     4600/=

Creditors on 31^st March 2005 was 5400

Receipt from debtors (1^st April to 5^th May) was  5700/=

Discount allowed to debtors                               100/=

Discount received from creditors                        180/=

Payment to creditors                                       5120/=

Stock donated to a charity (cost value)              340/=

Stock salvaged from fire                                   600/=

Gross profit margin 25% cost

Calculate;

1. The cost value of stock in store on 5^th May 2005 considering that on that day debtors amounted to 6500 and creditors to 4900.
   
2. The amount to be claimed from insurance company 
   

   Solution; Exercise 2.
   

 

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STOCK AS AT 28^TH DECEMBER 2004

WORKINGS

• NOTE (i)
  

  Sort out all items concerning with sales
  

  Cash sales                         1940
  

  Credit sales                       3400
  

                                          5340
  

 

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Less; goods not delivered           280

                                                        5060

Less; damaged value                      36

                 Net sales                   5024

           5024 x 75% =                 3768

Add; cost before damage         42

           COGS                             3810

NOTE (ii)

       Stock with a cost value =       295

Less; Realizable value         =     (178)

Loss in value of stock                   117

ESTIMATION OF STOCK