BA 3340 Lecture Notes - Lecture 31: Financial Accounting, Sole Proprietorship, Mission Australia
Document Summary
Apply the lower-of-cost-and-net-realisable-value rule to inventory. (cid:131) the cost principle requires that inventory be recorded at its cost. However, because of the principle of conservatism, accounting rules require that inventory be reported on the (cid:131) statement of financial position at its net realisable value (nrv) if the market value is lower tha(cid:374) the i(cid:374)(cid:448)e(cid:374)to(cid:396)(cid:455)(cid:859)s (cid:272)ost. This is so(cid:373)eti(cid:373)es (cid:396)efe(cid:396)(cid:396)ed to as a lower-of-cost-or-market value. Page 36 (cid:131) the inventory turnover ratio compares cost of goods sold during a period to the average. This means that the company generated more sales revenue while reducing the costs of stocking inventory on the shelves. Because the turnover ratio is sometimes difficult to interpret, it is often converted into: (cid:131) the days-in-inventory ratio converts the inventory turnover ratio into a measure of days by dividing the turnover ratio into 365 days. Naturally, companies would want this ratio to be as low as possible (lower days).
