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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.
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.
In any financial management scenario, decisions should be based on data-driven analysis and the overall financial health of the organization. While I respect the expertise of the finance manager and team members, my agreement or disagreement would depend on the reasoning behind their suggestions.
If the suggestions are backed by solid financial metrics, analysis, and align with the organization's goals, I would agree with their viewpoint. For instance, if the team proposes a project based on favorable NPV, IRR, and risk assessments, it shows that the decision is financially sound and minimizes risk.
However, if the suggestion is based on assumptions without robust data or strategic alignment, I would question the viability. Finance decisions should prioritize long-term sustainability and risk mitigation, not just short-term gains. If there's a lack of clear evidence supporting the recommendations, I would suggest a more detailed evaluation before moving forward.
In conclusion, while collaboration and team input are important, every decision should be critically analyzed based on financial data, potential risks, and alignment with the company’s objectives.
In financial management, analyzing the prospects of financial projects involves evaluating their viability, profitability, and risk. The main criteria typically used include:
Using these criteria, financial managers can systematically assess projects and make informed investment decisions.
Agree with Julie as Sales can not achieve the sales target
