INVENTORY VALUATION
Mrs Navdeep Kaur SGGSCC
▪ As-2 (Revised) defined inventories as follows:
▪ “Inventories are asset:
(a) Held for sale in ordinary course of business
(b) In the process of production for such sale; or
(c) In the form of materials or supplies to be consumed in the
production process or in the rendering of services”.
Mrs Navdeep Kaur SGGSCC 2
▪ Inventory Includes
• Raw Materials
• Work in Progress
• Finished Goods
• Other Items
Mrs Navdeep Kaur SGGSCC 3
▪Significance of Inventory Valuation
• Determination of Income
• Determination of Financial Position
• Analysis of Financial Statements
• Compliance with rules and statutes.
Mrs Navdeep Kaur SGGSCC 4
COST OF INVENTORIES
▪ As-2 (Revised) states that the cost of inventories should comprise. Other costs incurred in bringing the
inventories to their present location and condition.
1. The cost of purchase
a) Including duties and taxes
b) Freight inwards and other expenditure directly attributable to the acquisition.
c) Trade discounts, rebates, duty drawbacks are deducted.
2. The cost of conversion of inventories include costs directly related to the units of production, such as
direct labour.
▪ (a) Also include a systematic allocation of fixed and variable production overheads that are incurred
in converting materials into finished goods.
Mrs Navdeep Kaur SGGSCC 5
INVENTORY RECORD SYSTEMS : PERIODIC AND
PERPETUAL
1. Periodic Inventory System : Physically counting all the inventory items at the end of the year or at some other
regular intervals.
▪ Opening Inventory + Purchase – Closing Inventory = Cost of Goods Sold
▪ Advantages :
(a) Simple and less expensive
▪ Limitations
(a) Physical control not feasible
(b) As the cost of goods sold is calculated as residual figure, it includes the loss of goods during the period.
(c) There is lack of up-to-date information about inventory levels.
(d) Physical stock taking affects normal operations.
(e) Suitable for small stores
Mrs Navdeep Kaur SGGSCC 6
PREPETUAL INVENTORY SYSTEM.
(a) Inventory balance is continuously updated with each purchase and sale transaction.
(b) By maintaining a Stock Ledger or Stores Ledger.
(c) Closing stock is calculated as a residual figure.
(d) The performa of Stock or stores Ledger is given below:
Stores Ledger
Name of Item: Maximum Level:
Code No. : Minimum Level:
Location: Bin No. : Reorder Level:
Economic Order Quantity:
Date Receipts Issues Balance
Qty. Rate Amount(Rs.) Qty. Rate Amount (Rs.) Qty. Rate Amount (Rs.)
Mrs Navdeep Kaur SGGSCC 7
▪ Purchase are entered in the “Receipts” column and sales at cost are entered in the
“Issues” column.
▪ Merits
1. Record of the merchandise and inventory on hand is always available on daily basis.
2. Enterprises can calculate the cost of goods sold and the amount of profit on each sale.
3. Physical count of goods on hand can be compared with the perpetual inventory record
and thus, a built-in check.
4. Helps in deciding when to order the goods and how much to order etc.
▪ Demerits
▪ 1. It requires additional records keeping and thus is expensive.
Mrs Navdeep Kaur SGGSCC 8
DISTINCTION
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Mrs Navdeep Kaur SGGSCC 10
METHOD OF INVENTORY VALUATION
▪ Historical Cost Methods
▪ (1) Specific Identification Method
▪ (2) First-in First-out (FIFO) Method
▪ (3) Last-in First-out (LIFO) Method
▪ (4) Weighted Average Cost Method
▪ Non Historical Cost Methods
(1) Retail Inventory Method.
(2) Standard Cost Method
Mrs Navdeep Kaur SGGSCC 11
FIRST IN FIRST OUT (FIFO) METHOD
▪ The items of raw materials which are purchased first are assumed to be issued to production first.
▪ Advantages :
1. Closing inventory is recorded at cost and therefore, there is no unrealised holding gain or loss.
2. Inventory cost are charged to products in the order in which these costs are incurred.
3. The closing inventory reflects the current values to a large extent.
▪ Disadvantages:
1. It leads to improper matching of cost with revenues since the oldest costs are matched with current revenues.
2. During the rising prices, this method shows higher profit. During falling prices it shows lower amount of profit.
Thus this method is more suitable for those items of inventory whose prices fluctuate very little. Different
inventory costs may be assigned to identical jobs using the same type of inventory. Thus comparisons of the jobs from
the cost point of view becomes difficult.
3. Where purchases are made more frequently, keeping of the records becomes complicated.
4. Closing inventory maySGGSCC
Mrs Navdeep Kaur not reflect the current price. 12
Question
At the beginning of January, 2013 A Ltd. had in Stock 200 units @ Rs. 25 per unit. Further information for the month
of January is as follows:
Jan., 2013
2. Purchases : 400 units @ Rs. 30 per units
5. Sales : 300 units @ Rs. 40 per unit
10. Purchases : 500 units @ Rs. 35 per unit
15. Sales : 200 units @ Rs. 40 per unit
20. Sales : 200 units @ Rs. 42 per unit
25. Purchases : 600 units @ Rs. 36 per unit
28. Sales : 300 units @ Rs. 42 per unit
Calculate the cost of closing inventory and gross profit by first-in-first-out method under :
(a) Perpetual system of inventory; and
(b) Periodic system of inventory.
Also Calculate the cost of closing inventory and gross profit by last-in-first-out method and weighted average method.
Mrs Navdeep Kaur SGGSCC 13
Mrs Navdeep Kaur SGGSCC 14
Question
At the beginning of January, 2013 A Ltd. had in Stock 200 units @ Rs. 25 per unit. Further information for the
month of January is as follows:
Jan., 2013
2. Purchases : 400 units @ Rs. 30 per units
5. Sales : 300 units @ Rs. 40 per unit
10. Purchases : 500 units @ Rs. 35 per unit
15. Sales : 200 units @ Rs. 40 per unit
20. Sales : 200 units @ Rs. 42 per unit
25. Purchases : 600 units @ Rs. 36 per unit
28. Sales : 300 units @ Rs. 42 per unit
Calculate the cost of closing inventory and gross profit by first-in-first-out method under :
(a) Perpetual system of inventory; and
(b) Periodic system of inventory.
Also Calculate the cost of closing inventory and gross profit by last-in-first-out method and weighted average
method.
Mrs Navdeep Kaur SGGSCC 15
