Refer to Table 1 and other information provided. Calculate, using net realisable value, the: value of packed ground coffee inventory at 30 April 2021

Mark scheme

Marking points from the official mark scheme (May/June 2021). The mark or mark type is shown in brackets.

1. [1] NRV = saleable value of inventory – cost of selling it (if no relevant calculation)
2. [1] NRV of ground coffee 0–6 months = 2 × 20 – 0.5 = 39 500
3. [1] NRV of ground coffee 7–12 months = 1 × 10 – 0.5 = 9 500
4. [1] NRV of ground coffee over 12 months old = 0
5. [4] NRV Total ground coffee 0–12 months = $49 000
6. Other answers: Includes coffee beans $129 000 (3)
7. Other answers: No subtraction of cost of selling inventory $50 000 (3)
8. Other answers: Includes coffee beans and no subtraction of cost of selling inventory $130 000 (2)
9. OFR (Own Figure Rule) for (a)(i)
10. OFR from 2(a)(i) applies
11. Current assets = 150000
12. [1] 49 000 / 150 000 × 100
13. [2] = 32.7% OR 33%
14. Knowledge: Definition of inventory: Unsold goods, raw materials, work in progress.
15. Knowledge: Inventory is a current asset.
16. Knowledge: Methods of valuing inventory: Net Realisable Value = the amount the existing inventory can be sold for - cost of selling it.
17. Knowledge: Methods of valuing inventory: Valued at original cost.
18. Knowledge: Methods of valuing inventory: FIFO inventory valuation – assumes oldest inventory is sold first.
19. Knowledge: Methods of valuing inventory: LIFO assumes newest inventory is sold first [candidates are not expected to know FIFO or LIFO]
20. Knowledge: Methods of valuing inventory: Inventory valuation is normally made at the lower of historical cost and net realisable value.
21. Knowledge: Methods of valuing inventory: Accountants will apply rule of prudence when constructing the accounts
22. Knowledge: Role of inventory in statement of financial position. And the income statement.
23. Knowledge: Effect on accounting information of different valuation methods.
24. Knowledge: Effect on calculation of depreciation.
25. Knowledge: Stakeholder interest in correctly valued inventory.
26. Application: Inventory includes coffee beans, packaged ground coffee of different ages.
27. Application: 600 small retail customers – orders vary in frequency and size.
28. Application: Use of NRV calculated in 2(a)
29. Application: New inventory manager and accountant's view
30. Analysis: Price of coffee beans and ground coffee is volatile due to supply issues e.g. weather and disease. Therefore, the value of coffee inventory will also be variable and volatile. So it is difficult to measure the saleable value of coffee as market conditions change or are hard to assess.
31. Analysis: Coffee deteriorates and therefore the value changes over time making an accurate value difficult to determine.
32. Analysis: Deterioration of coffee and therefore its value depends on the conditions in which it is kept such as humidity and temperature.
33. Analysis: Value measured at one time, may not be representative of other times.
34. Analysis: Some inventory may never be sold or used thus its measured value may be inaccurate.
35. Analysis: Difficulty in assigning cost of selling inventory and therefore difficult to calculate NRV.
36. Evaluation: Ranking difficulties in order
37. Evaluation: Most important difficulty in valuing inventory of coffee
38. Evaluation: Pressure to make profit figures as high as possible or tax payable as low as possible could result in mis valuation. (Window dressing). Inventory valuation has a major impact on reported profit levels.
39. Evaluation: Incorrect valuation could lead to lower or higher profits being shown.
40. Evaluation: Each of these has disadvantages.
41. Evaluation: Legal or regulatory requirement to value inventory correctly in accounts