Question

Question 1

a) in arriving at the net realizable value of inventories, settlement discounts must be deducted from the expected selling price. Correct or Incorrect
b) The item is becoming obsolete and can cause the net realizable value of the respective item of inventory to be lower than its cost. Correct or Incorrect
c) It is permitted to value finished goods inventories at materials plus labour cost only without adding the production overheads. Correct or Incorrect

Answer 1

a) Incorrect. Settlement discounts are not deducted from the expected selling price when calculating the net realizable value of inventories. The net realizable value is determined by subtracting any estimated costs necessary to make the sale from the expected selling price, such as transportation costs or selling expenses.

b) Correct. If an item is becoming obsolete or is no longer in demand, it may result in the net realizable value of the inventory being lower than its cost. This is because the expected selling price of the item may be reduced due to decreased market demand or the need to offer discounts to sell the inventory.

c) Incorrect. Finished goods inventories should be valued at the cost of materials, labor, and production overheads. Production overheads include indirect costs such as factory rent, utilities, depreciation, and other expenses associated with the production process. It is important to consider all costs incurred in the production of finished goods when valuing inventory to accurately reflect its true cost.