Professional Documents
Culture Documents
Inventory Valuation
What to we learn?
• Inventory
– Components
• Why valuing inventory?
• Valuation system
– Periodic inventory system
– Perpetual Inventory System
• Valuation Methods
– FIFO
– LIFO
– WAC
• Impact of inventory valuation on the financial
statements
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Current Assets
• CAs
– Sell or consume with in one operating cycle
– Held primarily for trading
– Expected to realize the asset within in 12
months
– Cash equivalent
• Inventory
• Cash
• Receivables
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Inventory
• Raw materials
• Semi finished goods
• Finished goods
• Other items
– Stores and spares i.e. factory supplies
– Loose tools
– Packing materials
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• Matching Principle
– Matching Expense with Revenues in an Accounting
Period
– Matching for Inventories
• Determining the value of closing inventory to be deducted
from COGAS (to carry forward to the next period)
Thus matching the COGS with the revenue for the period
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Inventory Valuation
• LCM Principle
– Lower of Cost or Market Principle
• Cost
– Price at which inventory was acquired
• Market
– Net Realisable Value
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Inventory costs
• Products costs
– Inventoriable costs incurred to bring the inventories up to
their present location and condition
– Cost of purchase, conversion and other related costs
– Including duties, taxes, octroi
• Period expenses
– Expensed in the period in which these are incurred
– General administration, storage, selling, distribution, R&D
and interest
– Losses and abnormal expenses
– Fines, penalties, double freight, wastage, idle facility
expenses
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Cost Formulas
• Physical Flow
– The actual sequence in which the goods are
physically used or sold in the business
operations
• Cost Flow
– Association of costs with the assumed
sequence in which the goods are used or sold
Inventory Systems
• Periodic
– COGS ascertained at the end of accounting
period when physical inventory is taken
• Perpetual
– Real time basis of updating the purchases
and sales and the inventory on hand
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Possibility of real-
time Inventory Yes No
Control
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Perpetual Periodic
Inventory System Inventory System
FIFO √ √
LIFO √ √
WAC √ √
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Gross for
Financial Accounting profit 17,184
Managers-Zero Week Compiled by P.Srikanth 21
4. Financial Statements
• So,
• If Inventory value is MORE COGS value will be
LESS Gross Profit value will be MORE
• If Inventory value is LESS COGS value will be
MORE Gross Profit value will be LESS
FAM-Inventory Valuation Compiled by P.Srikanth 22
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