I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

make a loss if their clearance sales value is less than their cost. For example, if goods which originally 

cost $500 are now obsolete and could only be sold for $150, the business would suffer a loss of $350. 

If, at the end of an accounting period, a business still has goods in inventory which are either worthless 

or worth less than their original cost, the value of the inventories should be written down to: 

(a) 

Nothing, if they are worthless 

(b) 

Their net realisable value, if this is less than their original cost 

This means that the loss will be reported as soon as the loss is foreseen, even if the goods have not yet 

been thrown away or sold off at a cheap price. This is an example of prudence, referred to in Chapter 3. 

The costs of inventory written off or written down should not usually cause any problems when 

calculating the gross profit of a business, because the cost of goods sold will include the cost of 

inventories written off or written down, as the following example shows. 

1.8 Example: inventories written off and written down 

Lucas Wagg, trading as Fairlock Fashions, ends his financial year on 31 March. At 1 April 20X5 he had 

goods in inventory valued at $8,800. During the year to 31 March 20X6, he purchased goods costing 

$48,000. Fashion goods which cost $2,100 were still held in inventory at 31 March 20X6, and Lucas 

Wagg believes that these could only now be sold at a sale price of $400. The goods still held in 

inventory at 31 March 20X6 (including the fashion goods) had an original purchase cost of $7,600. 

Sales for the year were $81,400. 

Required 

Calculate the gross profit of Fairlock Fashions for the year ended 31 March 20X6. 

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