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They valued inventory at AED 7.52 million (23,500 unit X AED 320/ unit) in their SoP for the FY 2010. Market price for the product was AED 220/unit at closing date. When cost was analyzed it was found that due to economic recession the company remained unable to sell enough products to cover even their operational/production overheads. Finance Manager advised to reduce the inventory to their NRVs and charge the balance to Income statement. The debit treatment was advised by his team members as follow: 1.Julie :- charge the balance amount to "Cost of Sales" as these were operational/production overheads. 2.Pratab : - These should be charged to sales department as they could not sell the products. 3.Ali :- These should be considered as general expense or should be allocated to each reporting function on a fair basis. 4.Mark :- These are extra-ordinary expenses and shall not be treated as part of operations income/expense.
Accorfing to IAS2 iventory should be measured at the lower of cost or NRV, in this case our NRV is low shot it should be recorded at NRV and difference should be charged to P&L. Julie is right and different should be charged to CGS, becaut it is related to core operations of the business
In according with the recognised accounting standards the same has to be charged expense.
But the same has to charged to General expenses, since does not qualify for extra ordinary expense if the production/ valuation accounting period differs or the same can be charged to COGS if the production/ and valuation pertains to same accounting period
I agree if his suggetions agree with the legislations that rules the affairs in establishments
Your company will record AED2.35 million write down as a loss, thereby decreasing inventory and increasing cost of goods sold. Also, this needs to be included net profit or loss for the period in which it arises.
Agree with Julie as Sales can not achieve the sales target
It makes sense for the finance manager to recommend charging the remaining amount to the income statement and adjusting inventory to its net realizable value (NRV). Accounting standards are followed by Julie's suggestion to charge it to "Cost of Sales". It doesn't seem as relevant to follow Mark's advice to classify it as extraordinary expenses.
As per Accounting Standared IAS 2 Inventory: Inventory must be recorded subsequently at lower of Cost or NRV (Net realiseable Value).NRV is Selling Price Less Cost to sell.
As per given senario Original price is 320 but now assumed due to market recession Market Price per unit is 220 which is impaired by 100 (320-220).
Impairement loss Debit 2,350,000 (Income Statement Cost of Sale)
Inventory (Credit) 2,350,000 (Financial Position)
No Absolutely not.the financial statement should be prepared on true data base either of not selling goods on right prices or the loss occured due to any reason.
