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chapter 16.docx

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ACCT 301
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Chapter 16 The Purchase Cost of Stocks basically, when a company purchases stock from a creditor, whether by cash or on credit, the company would gather the source documents, and enter the details in the books of prime entry. Thus, the cost paid for each purchase is the purchase cost of stock, right? Not necessarily, because first of all, the cost paid for each item purchased may differ during each purchase, either due to discounts, sale, inflation, etc. In addition, imagine purchasing 100 items of stock every month, and at each month the amount paid for each item differs slightly, how is it possible to calculate which item was sold and how much money we made on each item? Furthermore, imagine items being returned others being damaged or stolen. The process of thinking about it is tedious enough imagine trying to record it! NRV, Current Replacement Costs and the Selling Price of Stocks basically, before we proceed, Stock is valued at the lower of its net realizable value and its historical cost value. The net realizable value is the expected selling price for each item of stock less any costs still to be incurred in getting them ready for sale. The Current Replacement Cost is the amount it would cost to replace each item of cost. Historical Cost is simply the cost at which they were originally bought. The reason why stock is valued at the lower of the net realizable value and historical cost is due to the prudence concept. The selling price is avoided because it would include a profit figure for the business before the stock is even sold! Furthermore, SSAP 9 encourages the use of two methods FIFO and AVCO, and discourages the use of LIFO whilst valuing stock. FIFO, AVCO and LIFO FIFO stands for, First in, First Out, and it assumes that materials are issued out of stock in the order in which they were delivered into stock. In other words, the first item supplied is the first item sold. Hence, issues are priced at the cost of the earliest delivery remaining in stock. LIFO stands for Last in, First Out, and it assumes that materials are issued out of stock in the reverse order to which they were delivered. In other words most recent deliveries are issued before earlier ones, and are priced accordingly. AVCO stands for Cumulative Weighted Average Pricing, which calculates a weighted average price for all units in stocks. This could be very helpful in determining the cost of consignment stock. Basically a new weighted average price is calculated whenever a new delivery of materials into store is received. Well basically it says that at the particular date we either had a receipt of goods into the company, or we issued some goods. In other words receipts are purchases and issues are sales (I used the terms receipts and issues as it was used in the BPP example). The number of units received or issued, their corresponding unit price and their market value on the date of transacti
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