The document discusses inventory valuation and different methods used for valuing inventories. It defines inventories as assets held for sale, in production for sale, or materials/supplies used in production or rendering services. Inventories arise due to time lags in purchase and sale or processing. They must be valued at the lower of cost or net realizable value. Cost includes all purchase, conversion and other costs to bring inventory to its present condition/location excluding abnormal costs. Common costing methods are FIFO, LIFO and weighted average.

1. INVENTORY VALUATION
Presented by: GROUP 3 (B. Com H)
Kunal Aggarwal (3901)
Kunal Goel (3924)
Kunal Jain (3883)
Komal Malik (3804)
Kshitij Mudgal (3896)
Kshitiz Agarwal (3789)

2. 
Inventories are defined by AS-2 (Revised) as an
asset:
 Held for sale in the ordinary course of business,
 In the process of production for such sale,
 In the form of materials or supplies to be consumed in
the production process or in the rendering of services.

3. 
Inventory: Arises out of:
▪ Time lag between purchase and sales,
▪ Processing time lag,
 One of the largest assets of a firm,
 Constitutes:
▪
▪
▪
▪
▪
▪
finished goods,
work-in-progress,
raw materials;
also consumables,
loose tools,
stores and spares, etc.

4. 
The significance of inventory valuation is as follows:
 Determination of Income,
 Determination of Financial Position,
 Analysis of Financial Statement,
 Compliance with rules and statutes.

5. 
DETERMINATION
OF
VALUE
AT
WHICH
INVENTORES ARE CARRIED IN B/S.

ASCERTAINMENT OF COST (MANNER)

SITUATION IN WHICH CARRYING COST OF
INVENTORIES IS WRITTEN BELOW COST.

6. 


Held for sale in ordinary course of business .
In the process of production for such sales ,or
In the form of materials or supplies to be
consumed in the production process or in the
rendering of services.

7. 

Inventories should be valued at lower of cost
and net realisable value.
NET REALISABLE VALUE = Estimated selling
price – estimated cost necessary to make
sale.

8. 
These include all cost of purchase , cost of conversion
and other cost incurred in bringing the inventories to
their present location and condition.

But it does not include:

i) abnormal amount.

ii) storage cost unless necessary in the production.

iii) administrative overheads.

iv) selling and distribution cost.

9. 

It consists of the purchase price including
duties and taxes, freight inwards and other
expenditure directly attributable to the
acquisition.
Trade discounts, rebates, duty drawbacks and
other similar items are deducted in
determining the costs of purchase.

10. X ltd purchased 1200 kg where purchase policy was
as follows:Purchase lots
rates (in Rupees)
0-10,000
20
Above 10,000 to 15,000
19
15,000-20,000
18
The vendor offers a 10% discount to X ltd for being
a regular customer. A VAT of 20% is applicable.
Freight was charged @ Rs.20/kg inclusive of
loading in boxes for 100 kg and these boxes are
charged @ Rs. 5/kg. These boxes can be returned at
50% of cost. 80% of boxes were returned in the
end.

11. STATEMENT FOR CALCULATION OF PURCHASE COST
purchase cost
(-) trade discount
+ VAT
+ freight
+cost of boxes
(-) returned boxes
Total purchase cost
Quantity purchased
Effective purchase cost per
unit
1200x 19
120x 5
96 x 2.5
228,000
(22800)
2,05,200
41,040
2400
600
(240)
270,600
1200
2,70,600 22.55
1200

12. 



Recurring loss
Pre estimated
Uncontrollable
Inherent to nature of commodity
ITEM
Qty
Price
Total
Mango
100
35
3500
(30)
(0)
(0)
70
Tomato
100
3500
30
3000
(10)
(100)
90
2900

13. 
In case of Mango 30 Units were not good therefore there
was no scrap value, here cost per unit is 3500/70=50

In case of Tomato 10 Units were not good but the
they were sold at Rs. 10 per unit therefore scrap
value was Rs. 100, here cost per unit is 2900/90=
32.22
•
Total Cost – Scrap Value
COST / UNIT =
Total Units – Normal Loss

14. 
Are valued at cost per unit.

After this valuation, abnormal losses are
transferred to Profit & Loss Account.

15. 
It includes costs directly related to the units of
production, such as direct labour. Direct labour is
added on accrual basis.
CASE STUDY:- Find the cost of a product where budgeted output
was 10,000 units and actual output is 7,000 units. Material is Rs.
25.00 per unit and wages are Rs. 10.00 per unit, variable overhead
is Rs. 5.00 per unit and fixe overhead is Rs. 1,00,000/Finding out cost per unit.
Material
=
25
Wages
=
10
Variable overhead =
5
Fixed overhead
=
1,00,00
=10
10,000
Total cost per unit is Rs. 50/-

16. Expected selling price – cost of completion and those for
making sales.
CASE STUDY: Find NRV of the stock of tunkle chips Ltd.
There is a stock of 20 Kgs of unpacked chips. These packed in
wrapper's of 200 gms. Which are sold at Rs. 20.00/- per
packet. The wrapper cost is Rs. 1.00 per packet.
Grams
=
20 x 1000
Numbers of packet =
20,000 = 100 packets
200
Cost
=
100 x 20 =2,000

Net Realizable Value
(-) 100 x 1 = 100
=
Rs. 1900/-

17. 
The Accounting policies adopted in
measuring inventories, including the cost
formula used.

The cost carrying amount of inventories and
its classification appropriate to the
enterprises.

18. 

Periodic Inventory System
Perpetual Inventory System

19. 
Periodic inventory is a system of inventory in which updates
are made on a periodic basis. In a periodic inventory system
no effort is made to keep up-to-date records of either the
inventory or the cost of goods sold. Instead, these amounts
are determined only periodically - usually at the end of each
year. This physical count determines the amount of
inventory appearing in the balance sheet. The cost of goods
sold for the entire year then is determined by a short
computation

20. 


The periodic inventory system only updates the ending inventory
balance when you conduct a physical inventory count. Since physical
inventory counts are time-consuming, few companies do them more
than once a quarter or year. In the meantime, the inventory account in
the accounting system continues to show the cost of the inventory that
was recorded as of the last physical inventory count.
Under the periodic inventory system, all purchases made between
physical inventory counts are recorded in a purchases account. When a
physical inventory count is done, you then shift the balance in the
purchases account into the inventory account, which in turn is adjusted
to match the cost of the ending inventory.
The calculation of the cost of goods sold under the periodic inventory
system is:
Beginning inventory + Purchases = Cost of goods available for sale
Cost of goods available for sale – Ending inventory = Cost of goods sold

21. 




The periodic inventory system is most useful for smaller businesses that
maintain minimum amounts of inventory. For them, a physical inventory
count is easy to complete, and they can estimate cost of goods sold figures
for interim periods. However, there are several problems with the system:
It does not yield any information about the cost of goods sold or ending
inventory balances during interim periods when there has been no physical
inventory count.
You must estimate the cost of goods sold during interim periods, which will
likely result in a significant adjustment to the actual cost of goods whenever
you eventually complete a physical inventory count.
There is no way to adjust for obsolete inventory or scrap losses during
interim periods, so there tends to be a significant (and expensive) adjustment
for these issues when a physical inventory count is eventually completed.
It is not an adequate system for larger companies with large inventory
investments, given its high level of inaccuracy at any given point in time
(other than the day when the system is updated with the latest physical
inventory count).

22. (1). When goods are purchased from supplier:
Purchases
To Accounts payable
(2) When expenses are incurred to obtain goods for sale – freight-in,
insurance etc:
Freight-in
Insurance
To Cash/Bank
(3). When goods are returned to supplier:
Accounts payable
To Purchases returns
(4). When payment is made to supplier:
Accounts payable
To Cash/Bank

23. (5). When goods are sold to customers:
Accounts receivable
To Sales
(6). When goods are returned by customers:
Sales returns
To Accounts receivable
(7). At the end of the period:
Inventory (ending)
Cost of goods sold (B.F)
To Purchases
To Inventory (beginning)

24. 
In perpetual inventory system, merchandise inventory and
cost of goods sold are updated continuously on each sale and
purchase transaction. Some other transactions may also
require an update to inventory account for example,
sale/purchase return, purchase discounts etc. Purchases are
directly debited to inventory account whereas for each sale
two journal entries are made: one to record sale value of
inventory and other to record cost of goods sold. Purchases
account is not used in perpetual inventory system.

25. 




Perpetual inventory system is costly to maintain but
it has numerous advantages which are as follows
It obviates the need for stock taking by actual
counting at the end of financial period.
There is no sudden ‘out of stock’ situation.
It does not need special staff to be employed for
stock taking.
Controlling losses is easier under this method as
inventory records continuosly indicate the goods
that must be in hand.

26. For Perpetual Inventory System:

27. BASIS
PERIODIC INVENTORY SYSTEM
PERPETUAL INVENTORY SYSTEM
Basis of
ascertaining
Inventory
Closing Inventory is ascertained by
physical count.
Closing Inventory is ascertained from
accounting records.
Availability
of
Information
Generally at the end of the
accounting period or at some other
regular intervals.
On continuous basis after each
purchase and sale.
Inventory
control
Not feasible.
Actual amount of closing inventory
cannot be compared with book
records.
Physical count can be compared with
perpetual inventory record and thus
inventory control is feasible.
Effect on
normal
operations
May affect normal operations of the
business for sometime due to
physical count.
It will NOT affect the normal
operations of the business if no
physical count is made.
Simplicity
It is simple and less costly.
and cost
effectiveness
It requires additional record keeping
which is not worth in case of small
concerns dealing in low cost items.

28. 
SPECIFIC IDENTIFICATION OF COSTS

FIRST-IN, FIRST-OUT

LAST-IN,FIRST-OUT

WEIGHTED AVERAGE METHOD

29. 


It requires a detailed physical count, so that the company knows exactly
how many of each goods brought on specific dates remained at year end
inventory. When this information is found, the amount of goods are
multiplied by their purchase cost at their purchase date, to get a number
for the ending inventory cost.
In theory, this method is the best method, since it relates the ending
inventory goods directly to the specific price they were bought for.
However, this method allows management to easily manipulate ending
inventory cost, since they can choose to report that the cheaper goods
were sold first, hence increasing ending inventory cost and lowering cost of
goods sold. This will increase the income. Alternatively, management can
choose to report lower income, to reduce the taxes they needed to pay.
Using this method, it is very hard to relate shipping and storage costs to a
specific inventory item. These numbers will need to be estimated, hence
reducing the specific identification method's benefit of being extremely
specific.

30. It is one of the methods commonly used to calculate the
value of inventory on hand at the end of an accounting
period and the cost of goods sold during the period. This
method assumes that inventory purchased or manufactured
first is sold first and newer inventory remains unsold. Thus
cost of older inventory is assigned to cost of goods sold and
that of newer inventory is assigned to ending inventory.
First-In, First-Out method can be applied in both the periodic
inventory system and the perpetual inventory system.

31. Bike LTD purchased 10 bikes during January and sold
6 bikes, details of which are as follows:
January 1 Purchased 5 bikes @ ₹5000 each
January 5 Sold 2 bikes
January 10 Sold 1 bike
January 15 Purchased 5 bikes @ ₹7000 each
January 25 Sold 3 bikes

32. DATE
PURCHASES
UNITS - RATE - AMT
JAN1
SALES
UNITS - RATE - AMT
5 – 5000 - 25000
STOCK IN HAND
UNITS - RATE - AMT
5 - 5000 - 25000
JAN 5
2 - 5000 - 10000
3 - 5000 - 15000
JAN 10
1 - 5000 - 5000
2 - 5000 - 10000
JAN 15
JAN 25

5 - 7000 35000
2 - 5000 - 10000
5 - 7000 35000
2
- 5000 - 10000
1 - 7000 - 7000
4 - 7000 - 28000
The value of 4 bikes held as inventory at the end of January may be calculated as
follows:
The sales made on January 5 and 10 were clearly made from purchases on 1st
January. Of the sales made on January 25, it will be assumed that 2 bikes relate to
purchases on January 1 whereas the remaining one bike has been issued from the
purchases on 15th January.

33. This method assumes that inventory purchased last
is sold first. Therefore, inventory cost under LIFO
method will be the cost of earliest purchases. Using
the LIFO method to evaluate and manage inventory
can be tax advantageous, but it may also increase
tax liability.

34. Bike LTD purchased 10 bikes during January and sold
6 bikes, details of which are as follows:
January 1 Purchased 5 bikes @ ₹5000 each
January 5 Sold 2 bikes
January 10 Sold 1 bike
January 15 Purchased 5 bikes @ ₹7000 each
January 25 Sold 3 bikes

35. DATE
PURCHASES
UNITS - RATE - AMT
JAN1
SALES
UNITS - RATE - AMT
5 – 5000 - 25000
STOCK IN HAND
UNITS - RATE - AMT
5 - 5000 - 25000
JAN 5
2 - 5000 - 10000
3 - 5000 - 15000
JAN 10
1 - 5000 - 5000
2 - 5000 - 10000
JAN 15
JAN 25
5 - 7000 35000
2 - 5000 - 10000
5 - 7000 35000
3 - 7000 - 21000
2 - 5000 - 10000
2 - 7000 - 14000
The value of 4 bikes held as inventory at the end of January may be calculated as
follows:
The sales made on January 5 and 10 were clearly made from purchases on 1st January.
However, all sales made on January 25 will be assumed to have been made from the
purchases on January 15.

36. 
As can be seen from BEFORE, LIFO method
allocates cost on the basis of earliest
purchases first and only after inventory from
earlier purchases are issued completely is
cost from subsequent purchases allocated.
Therefore value of inventory using LIFO will
be based on outdated prices. This is the
reason the use of LIFO method is not
allowed for under IAS 2.

37. POINT OF DIFFERENCE
Stands for:
Unsold inventory:
FIFO
LIFO
First in, first out
Last in, first out
Unsold inventory is comprised of goods
acquired most recently.
There are no GAAP or IFRS restrictions for
using FIFO.
Unsold inventory is comprised of the earliest
acquired goods.
IFRS does not allow using LIFO for
accounting.
Effect of Inflation:
If costs are increasing, the items acquired first
were cheaper. This decreases the cost of
goods sold (COGS) under FIFO and increases
profit. The income tax is larger. Value of
unsold inventory is also higher.
If costs are increasing, then
recently acquired items are more expensive.
This increases the cost of goods sold (COGS)
under LIFO and decreases the net profit. The
income tax is smaller. Value of unsold
inventory is lower.
Effect of Deflation:
Converse to the inflation scenario, accounting Using LIFO for a deflationary period results
profit (and therefore tax) is lower using FIFO in both accounting profit and value of unsold
in a deflationary period. Value of unsold
inventory being higher.
inventory, is lower.
Record keeping:
Since oldest items are sold first, the
number of records to be maintained
decreases.
Restrictions:
Fluctuations:
Since newest items are sold first, the oldest
items may remain in the inventory for many
years. This increases the number of records
to be maintained.
Only the newest items remain in the
Goods from number of years ago may
inventory and the cost is more recent. Hence, remain in the inventory. Selling them may
there is no unusual increase or decrease in
result in reporting unusual increase or
cost of goods sold.
decrease in cost of goods.

38. It is a method of calculating Ending
Inventory cost. It takes Cost of Goods Available
for Sale and divides it by the total amount of
goods from Beginning Inventory and Purchases.
This gives a Weighted Average Cost per Unit. A
physical count is then performed on the ending
inventory to determine the amount of goods
left. Finally, this amount is multiplied by
Weighted Average Cost per Unit to give an
estimate of ending inventory cost.

39. Bike LTD purchased 10 bikes during January and sold
6 bikes, details of which are as follows:
January 1 Purchased 5 bikes @ ₹5000 each
January 5 Sold 2 bikes
January 10 Sold 1 bike
January 15 Purchased 5 bikes @ ₹7000 each
January 25 Sold 3 bikes

40. DATE
PURCHASES
UNITS - RATE - AMT
JAN1
SALES
UNITS - RATE - AMT
5 – 5000 - 25000
STOCK IN HAND
UNITS - RATE - AMT
5 - 5000 - 25000
JAN 5
2 - 5000 - 10000
3 - 5000 - 15000
JAN 10
1 - 5000 - 5000
2 - 5000 - 10000
JAN 15
JAN 25
5 - 7000 35000
2 - 5000 - 10000
5 - 7000 35000
---------------------------7 - 6428.5 - 45000
3 - 6428.5 - 19285.5
4 - 6428.5 - 25714.5