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Stock Held for Sale and Work in Progress Print E-mail
  1. When deciding on selling prices, the accurate recording of stock held for sale at the true cost price is paramount in determining a selling price that will make a profit for the business. In order to be successful in retail, a target gross profit should be sufficient to cover variable costs and fixed cost overheads.  For this reason, many businesses use cost plus pricing to determine selling prices. Gross profit margins vary in different industries, but as a general guide a well performing business earns at least 60% gross profit and 30% net profit from the sale of stock.  Profit is used to reinvest into the business and to pay dividends to shareholders. 
  2. To determine accurate gross profit, the cost of stock is not recognised immediately in the income statemen. Purchased stock is stored in the balance sheet until such time the specific item is sold. If the sale and cost price of stock is matched in the profit and loss account in the same period, the true gross profit can be calculated and monitored, allowing the business to adjust pricing policies as necessary. In rare cases, stock is sold at a loss to introduce price competition into a specific market. 
  3. A value for work in progress and stock is included in the balance sheet of financial statements. The double entry for recording stock is Dr Stock in the balance sheet (a current asset) and Cr Closing stock in the Profit and loss account (increasing profit reported for the accounting period).

  4. Accounting standards in UK require that stock is stated at the lower of cost and net realisable value. Therefore stock that will sell for a profit is stated at cost, for example the invoiced cost of a product held for sale. However, if stock realistically has to be sold at a loss, it is stated at the net sales value after deducting all the costs that need to be incurred to sell the stock. This is done to prevent overstating profits.  As accounts are prepared after the accounting period has ended, the sales value of stock sold after year end that was held at the year end can be used to estimate if unsold stock will sell at a loss or a profit.

  5. The primary statement of profit and loss shows turnover (income) less cost of sales to work out the gross profit. Cost of sales are the direct costs incurred to produce the products or services sold and recorded as turnover. It includes cost of purchasing raw materials or products, transformation of raw materials to finished goods, the opening value of stock held at the beginning of the accounting period, less the closing value of stock held at the end of the accounting period.  In this way, the sales and directly related costs are matched to show the true profit made in the period. The items that are included in cost of sales will vary from company to company and is partly a judgement call made by the directors.

  6. Your balance sheet will balance because you have adjusted stock and accumulated profit in the balance sheet by the same amount.

  7. Provisions have to me made against stock that becomes obsolete due to competing products entering the market, old technologies replaced by better technologies, changing fashion trends or damage.  If stock items remain in store for longer than normal or directors decide they no longer have any use for the items, items should be written off as a loss to the profit and loss account. A review of obsolete stock is usually carried out monthly or at least annually. If there is a measure of uncertainty, closing stock is reduced by the provision and adjusted annually for changing trends.

  8. For complicated businesses a bar coding system is used to record the costs and selling prices of individual stock lines, each line recorded using its own unique bar code.  Stock is counted under controlled conditions periodically to ensure that the record of invoiced purchases matches the physical count of stock. This old fashioned method is still the best to ensure any lost or stolen stock is identified.

  9. A detailed record of stock is also used in product costing. To work out what the selling price of a product should be, one method is to add all the costs that go into producing the product  together and then to add a target profit on to the total cost of the product. The resulting prices need to cover any fixed overheads or general running costs of the business whilst maintaining a competitive edge over the price of competing products in the market. A detailed cost card records each cost that goes into producing a product. This is also a useful tool for the stock valuation of finished goods or work in progress.

  10. From time to time stock needs to be reviewed for obsolesence. It is important to be able to track when stock was purchased and how long it takes for the business to turn stock into cash.  If stock remains on the books too long, it should be disposed of at a lower price to release cash for investment in profit making stock. Scrapped stock is written off to the income statement as stock losses.
  11. Provisions for obsolence can be made for stock that is likely to be written off to reduce tax liabilities in a specific period, therefore stock obsolescence reviews are usually carried out around year end when the financial statements are being drawn up and planning for the new fiscal period begins.
  12. An average calculation of how long stock remains on the balance sheet before being sold can be used to plan for cash requirements and is calculated as follows: Balance sheet stock balance/Cost of good sold x 365


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