Accounting Concepts & Inventory Valuation

AS: Unit 2 Anita McMullen 2012/13

Aims & Objectives

Aims: Introduce accounting concepts Introduce inventory valuation Objectives: students will be able to: recognise & explain different accounting concepts Explain the rules of how inventory should be valued

Introduction
So far, only concerned with the mechanics of recording transactions ie double entry However, this has been based on certain rules Rules known as Concepts of Accounting.
Can be custom or practice Can be enforced through accounting standards or Companies Acts

Financial Statements for all purposes

Users of financial statements? Do they all need precisely the same information? What would happen if different income statements accounts and statements of financial position were prepared for different users?

Objectivity & Subjectivity

Objective
Based upon a fact/factual occurrence Can be supported by independent evidence

Subjective
Based on judgement or interpretation May be bias towards own views & preferences

Financial Accounting seeks objectivity.

Rules of Accounting
Underlying Accounting Concepts
Custom or practice

Accounting Standards Board

Statement of Principles Fundamental Accounting Concepts

Legal Framework

Underlying Accounting Concepts

The historical cost concept The money measurement concept

The business entity concept

The dual aspect concept The time interval concept

What makes financial information useful? Relevance

Reliability
Comparability

Understandability For financial information to be useful it must also be material.

Fundamental Accounting Concepts

Going concern

Consistency
Prudence Realisation concept

Accruals (Matching)

Materiality
And overriding rule applied to everything Something which could distort the view given by the financial statements Is dependent on judgement

Size and type of business may affect this decision regarding materiality

Inventory Valuation
Lower of cost or net realisable value IAS 2
Is the cost price lower than the selling price?

YES

NO

Value stock at cost price

Value stock at selling price (Net Realisable Value)

Aims & Objectives

Aims: Introduce accounting concepts Introduce inventory valuation Objectives: students will be able to: recognise & explain different accounting concepts Explain the rules of how inventory should be valued