Accounting Standard: 2

Valuation of Inventories
Accounting Standard-2 deals with:
• Determination of value at which inventories
are carried in B/S,
• Ascertainment of cost (manner),
• Situation in which carrying cost of inventories
is written below cost.
Inventories are assets:
• held for sale in ordinary course of business,
• in the process of production for such sale,or
• in the form of material or supplies to be consumed in the
production process or in the rendering of services.
Measurement: Inventories should be
valued at lower of Cost and Net realisable
value.
Net Realisable Value =
Estimated selling price – Estimated cost
necessary to make sale.
Cost of Inventories: These include all cost of
purchase, cost of conversion and other cost
incurred in bringing the inventories to their present
location and condition.
But does not include:
i) abnormal amount,
ii) storage cost unless necessary in the
production,
iii) administrative overhead,
iv) selling and distribution cost.
• Cost of Purchase: Purchase price net of Trade discount,
Rebate, etc.
• Cost of conversion: include cost directly related to unit of
production i.e. direct wages, variable overhead, allocable fixed
overhead.
Cost Formula: Valuation of inventories
depend on cost formula used by entity:
a) Specific identification method,
b) FIFO,
c) Weighted Average,
d) Standard Cost,
e) Retail Method (for retail trader).
• Application of formula: Cost formula is
applied in in item by item except one
situation.
• Inventories are not written down below
cost if finished product of such inventory
are expected to be sold at above cost.
Disclosure:
• Accounting policy adopted in measuring
including cost formula used,
• Total carrying cost of inventories and its
classification.
THANKS.