Inventory

Inventory: Inventory includes tangible property that: 1. is held for sale in the normal course of business or 2. is held in the process of production for such sale 3. Or is held for the consumption in the production of goods or services for sale including maintenance, supplies and consumables
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Objectives of Inventory Valuation

Determination of Income Determination of Financial Position

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Inventory System
Following are two inventory systems: 1. Periodic inventory system: In this case the quantity and value of inventory is found out only the end of the accounting period after having physical verification of units in hand. 2. Perpetual inventory system: It is an automatic inventory system where details regarding quantity and value of stock is available at all times.
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Inventory Valuation Method

Valuation of Inventory: Inventory should
be valued at the lower of cost or market price( net realizable value).

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Cost of inventory: Cost of the inventory is the aggregate of costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

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Inventory Costing Methods

Four commonly used methods are: 1. Specific Identification method 2. First in first out method 3. Last in, first out method 4. Weighted average cost method

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Specific Identification Method

This method identifies the cost of each item in ending inventory. This method may be used only if units in ending inventory can be identified as coming from specific purchases. Suitable for high value low volume inventory like jewelry.

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First in First out method

Under this method it is assumed that materials/goods received first are issued /sold first. Thus the cost of units in closing inventory will be that of the most recent purchases.

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Last in first out method

This method is based on the assumption that last item of materials purchased are first to be issued/ sold. Thus according to this method, inventory consists of items purchased earliest.

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Weighted Average Method

Under this method, inventory is priced at the average cost of the goods available for sale during the accounting period. Average cost is computed by dividing the total cost of goods available for sale by the total units available for sale.

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In addition to the above some other methods used are: 1. Highest in first out Method(HIFO) 2. Base Stock Method

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Choice of Appropriate Method

Requirements of AS 2 as to the method. Requirement for Income Tax purposes.

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Net Realizable Value

The net realizable value means the estimated selling price in the ordinary course of business less costs necessary to make sale.

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Three methods for comparison

Aggregate or total inventory method Group Method Item by Item Method

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