CA FOUNDATION MARATHON | INVENTORIES 10.

10. INVENTORIES

Inventories are assets

• Held for sale in the ordinary course of business
• Used in the process of production for such sale; or
• Used in the form of materials or supplies to be consumed in the production process or
in the rendering of services
• WIP

Meaning:
“Assets” – includes Finished Goods, Work-In-Progress and Raw Materials, Stores and Spare
parts.
Nature:
Inventory is part of current assets and also working capital.

Types of inventories

Manufacturing Concern Trading Concern

Raw Work –in-

Finished goods Finished goods
Materials progress

Impact of closing stock

Situation Impact on Profits Impact on Balance Sheet

Overstated Current Assets
Closing Stock – Overstated
overstated
Closing Stock – Understated Current Assets
Understated understated
Current Year Profits – -
Opening Stock – Understated
Overstated Previous Year Profits –
Overstated

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CA FOUNDATION MARATHON | INVENTORIES 10.2

Current Year Profits – -

Opening Stock – Overstated
Understated Previous Year Profits –
Understated
Inventory Valuation affects tax liability and income but does not affect Cash Flow

1. PRINCIPLE FOR VALUATION

Principle: Cost or Net Realisable Value whichever is lower.
The above principle is based on convention of conservatism.
“Cost” excludes – Storage Costs, Interest costs, Abnormal Losses, Administration OH,
Selling & Distribution OH

Net Realisable Value: Estimated Selling Price – Estimated Costs of completion – Estimated
cost necessary to make the sale

Entries for Closing Stock:

If Appears in Trial Balance If does not appear in Trial Balance

Closing Stock A/c Dr. Closing Stock A/c Dr.

To Purchases A/c To Trading A/c

Appears in both balance sheet and

Appears only in Balance Sheet
trading account

2. METHODS OF INVENTORY VALUATION

Specific Identification Method:
• Actual Costs are specifically identified for each product separately.
• Useful for HIGH VALUE items – Significant items – Items which are not
interchangeable.

FIFO Vs LIFO Method:

Particulars FIFO Method LIFO Method
Assumption Goods coming in first will go out Goods coming in later will go
first. out first.
Closing Stock Closing Stock consists of latest Closing Stock consists of
purchases. earlier purchases.

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CA FOUNDATION MARATHON | INVENTORIES 10.3

Valuation Closing Stock will be valued at Closing Stock will be valued at

the prices of last purchases. the prices of initial purchases.
Inflation – Price Value of Closing Stock will be Value of Closing Stock will be
Increase / rising prices higher. lower.
Cost of Goods Sold will be lower. Cost of goods Sold will be
higher.
Deflation – Prices Value of Closing Stock will be Value of Closing Stock will be
decrease / falling prices lower. higher.
Cost of Goods Sold will be higher. Cost of Goods Sold will be
lower.
Matching of costs Current Costs are NOT matched Current Costs are MATCHED
with the current revenues. with the current revenues.
Recognition Approved by AS-2 NOT approved by AS-2
Similar to actual costs Closely equals the actual costs May not equal actual costs

***** Retail Selling Price Method / Adjusted Selling Price Method:

Applicability (a) Retail Traders (b) Inventories are small and not significant (c)
Similar Gross Profits Margins

Calculation Basic Formula: Cost of Goods Sold + Gross Profit = Selling Price.

Steps involved in Retail Price Method:

No. Particulars
1 In the Question, Selling Price will be given.
GP Ratio will be given. GP Ratio may be given as GP Ratio ON SALES or GP Ratio
2
may ON COST
3 If GP Ratio is given on Sales
Step 1 – (GP Ratio/100)  Selling Price = G.P. Amount.
Step 2 – Cost of Goods Sold = Selling Price – G.P. Amount.
Step 3 – Cost of Goods Sold (from Step 2) = Opening Stock
(given)+Purchases(given)+Direct Expenses(given) – Closing Stock (to be
found)
4 If GP Ratio is given on Cost
Step 1 – Since GP Ratio is on cost, but we do not know cost, assume Cost be “X”.

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CA FOUNDATION MARATHON | INVENTORIES 10.4

Step 2 – Formula – Cost of goods sold + GP = Sales = > X + (G.P. Ratio/100) 

(X) = Sales
Step 3 – From Step 2, Cost of goods sold shall be obtained and based on that,
Closing Stock will be found.
3. INVENTORY SYSTEMS
Particulars Perpetual Periodic
Meaning Continuous updating of stock Updating of stock records at fixed
records – Receipts & issues are intervals.
immediately recorded.

Stock value Stock value can be known at any Stock value will be known only at end
point of time. of fixed period.

Nature Stock Ledger maintained – FIFO, Physical Verification of closing stock.

LIFO etc.

4. RECONCILIATION OF STOCK AS PER PHYSICAL VERIFICATION AND STOCK AS PER STOCK

LEDGER:
FORWARD RECONCILIATION - Physical Stock taking before year ending date
A Stock Increasing Items Rs. B Stock decreasing Items Rs

1 Purchases at cost 1 Purchase Returns at cost

2 Sales Returns at cost 2 Sales at cost
[ Sale Value-Gross [Sales-Gross Profit]
Profit ]
3 Goods withdrawn by Proprietor at cost

4 Goods distributed as free at cost

samples
5 Goods lost by fire, theft, etc. at cost

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CA FOUNDATION MARATHON | INVENTORIES 10.5

BACKWARD RECONCILIATION - Physical Stocktaking after year ending date

A Stock Increasing Items Rs. B Stock decreasing Items Rs

1 Purchase Returns at cost 1 Purchases at cost

2 Sales at cost 2 Sales returns at cost
[ Sales - Gross Profit ] [ Sale Value - Gross Profit ]
3 Goods withdrawn by Proprietor at cost
4 Goods distributed as free samples at cost
5 Goods lost by fire, theft, etc. at cost

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CA FOUNDATION MARATHON | INVENTORIES 10.6

CLASS WORK

1. A trader prepared his accounts on 31st March, each year. Due to some unavoidable
reasons, no stock taking could be possible till 15th April, 2018 on which date the total
cost of goods in his go down came to ` 50,000. The following facts were established
between 31st March and 15th April, 2018.
(i) Sales ` 41,000 (including cash sales ` 10,000)
(ii) Purchases ` 5,034 (including cash purchases ` 1,990)
(iii) Sales Return ` 1,000.
(iv) On 15th March, goods of the sale value of ` 10,000 were sent on sale or return basis
to a customer, the period of approval being four weeks. He returned 40% of the goods
on 10th April, approving the rest; the customer was billed on 16th April.
(v) The trader had also received goods costing ` 8,000 in March, for sale on consignment
basis; 20% of the goods had been sold by 31st March, and another 50% by the 15th
April. These sales are not included in above sales.

Goods are sold by the trader at a profit of 20% on sales. You are required to ascertain the
value of Inventory as on 31st March, 2018. (RTP May 19)

Solution

Statement of Valuation of Stock on 31st March, 2018

Particulars ` `
Value of stock as on 15th April, 2018 50,000
Add: Cost of sales during the period from 31st March, 2018 to
15th April, 2018
Sales (` 41,000 – ` 1,000) 40,000
Less: Gross Profit (20% of ` 40,000) 8,000 32,000
Cost of goods sent on approval basis (80% of ` 6,000) 4,800
Less: Purchases during the period from 31st March, 2018 to 15th 5,034 86,800
April, 2018
Unsold stock out of goods received on consignment basis
(30% of ` 8,000) 2,400 7,434
79,366

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CA FOUNDATION MARATHON | INVENTORIES 10.7

2. Stock taking of XYZ Stores for the year ended 31st March, 2019 was completed by
10th April, 2019, the valuation of which showed a stock figure of ` 1,67,500 at cost as
on the completion date. After the end of the accounting year and till the date of
completion of stock taking, sales for the next year were made for ` 6,875, profit margin
being 33.33% on cost. Purchases for the next year included in the stock amounted
to ` 9,000 at cost less trade discount 10%. During this period, goods were added to
stock of the mark-up price of ` 300 in respect of sales returns. After stock taking
it was found that there were certain very old slow moving items costing ` 1,125 which
should be taken at ` 525 to ensure disposal to an interested customer. Due to
heavy floods, certain goods costing ` 1,550 were received from the supplier beyond the
delivery date of customer. As a result, the customer refused to take delivery and net
realizable value of the goods was estimated to be ` 1,250 on 31st March, 2019.
You are required to calculate the value of stock for inclusion in the final accounts for
the year ended 31st March, 2019. Closing stock is valued by XYZ Stores on generally
accepted accounting principles. (RTP Nov19)

Solution

Statement showing the valuation of stock as on 31st March

SNo. Particulars `
A Value of Stock as on 10th April, 2019 1,67,500
B Add: Cost of sales after 31st March, till stock taking 5,156
(` 6,875 – ` 1,719)
C Less: Purchases for the next period (net) 8,100
D Less: Cost of Sales Returns 225
E Less: Loss on revaluation of slow moving inventories 600
F Less: Reduction in value on account of default 300
G Value of Stock on 31st March, 2019 1,63,431

Note: Profit margin of 33.33 percent on cost means 25 percent on sale price.

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CA FOUNDATION MARATHON | INVENTORIES 10.8

3. The following are the details of a spare part of Sriram mills:

1-1-2016 Opening Inventory Nil

1-1-2016 Purchases 100 units @ ` 30 per unit
15-1-2016 Issued for consumption 50 units
1-2-2016 Purchases 200 units @ ` 40 per unit
15-2-2016 Issued for consumption 100 units
20-2-2016 Issued for consumption 100 units
Find out the value of Inventory as on 31-3-2016 if the company follows First in first out
basis.

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