Accounts -Inventory Valuation

By Md Amanullah Qureshi

 Definition:-The term inventory or wares or stock-in-trade means a complete list of goods that can be available for sale
in a specified time. Inventory valuation can be considered as a quantifiable process that helps in adjudging the
equitable value of an asset of a firm. The term, policies, and methods of valuation of inventories are well covered in
Accounting Standard (AS) 2. Inventories are tangible property of a firm that encompasses the procedure of purchasing
the goods and reselling them, for example, goods acquired by a wholesaler and holding on to reselling them. It should
be noted that all goods which are owned by a trading company are included in the inventory and held for resale, while
in a manufacturing company only raw material, work in progress, and finished goods are considered as inventory.
 Inventory is generally the most substantial component of the current assets grasped by trading or a manufacturing
enterprise. Resolution of income, the establishment of financial position, liquidity analysis, and statutory compliance
are the various point for the significance of inventory valuation. The error in valuing inventory causes an effect both on
Profit and Loss and the Balance Sheet as well. For instance, if the closing inventory is understated by ₹50,000  by
someone then the net profit and the current asset will also be understated.
 Valuation of inventories must always be evaluated at a lower cost or net realizable value
which is also referred to as cost realizable value. There should be always a change in the
price of inventory when distinct quantities are purchased at a distinct price at a diverse
time. A company can opt for the finest method for the valuation of inventory according to
the size and norms of the organization. FIFO (First In First Out ) and Average Price
Method are the best methods for the valuation of inventories and the first choice of any
business enterprise. Under the FIFO method, the stock that is purchased first by the
company is sold first, which means that all stocks are sold according to the sequence in
which they are obtained. By using the FIFO method a company can sell their old lots first
which helps the company to shape their inventory with more efficiency. The
further method for valuation of inventory is LIFO(Last In Last Out) and the weighted
Average Price Method. Some companies also use the LIFO method where they sell last
purchases first.
 In conclusion, inventory is the most valuable asset of business entities and it should be
valued with a certain basic principle that helps an organization to build up a strong
considerable financial statement.