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INVENTORIES

Inventory:It is a tangible property held: 1. For sale in the ordinary course of business (Finished goods). or 2. In the process of production for such sale (Work-in-progress) or 3. For consumption in the production of goods (Raw material) Including maintenance supplies and consumables other than Machinery spares. Types of inventories

In case of manufacturing concerns

In case of trading concerns

Finished goods

Raw Material

Work in progress

Finished goods

Covered in CPT & IPCC

Covered in CPT & IPCC

To be covered in IPCC

Inventory Valuation:A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements. Inventories should be generally valued at the lower of cost or Net realisable value. Cost Value of inventory = or Net realisable value/Net selling price/Mark et value Net Realisable Value:- This is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale.

Ex:- X ltd has an item in stock which cost Rs.10,000 and can be sold for Rs.12,000. However, before it can be sold, it will require to be modified at a cost Rs.1500. The expected selling expenses of the item are Rs.1,000. Estimated selling price = 12,000 ( - ) Estimated cost of completion = (1500) ( - ) Estimated selling expense = (1,000) Expense N/R/V = 9,500 The significance of inventory valuation arises due to various reasons as follows:(i) Determination of Income:- The valuation of inventory is necessary for determining the true income earned by a business entity during a particular period. Gross profit = Revenue (sales) Cost of goods sold Cost of goods = Opening stock + purchases + Direct expenses closing stock The effect of any over or understatement of inventory may be explained as : (a) When closing inventory is overstated, net income for the accounting period will be overstated. (b) When closing inventory is understated, net income for the accounting period will be understated. (c) When opening inventory is overstated, net income for the accounting period will be understated. (d) When opening inventory is understated net income for the accounting period will be overstated. (ii) Ascertainment of Financial position: Inventories are classified as current Asset in B/S. In case the inventory is not properly valued, the balance sheet will not disclose the correct financial position of the business. (iii) Liquidity Analysis:Inventories are classified as current asset, it is one of the major components of net working capital which reveals the liquidity position of the business. Improper valuation of inventories may effect the liquidity position. Techniques of inventory valuation

Historical cost method

Non-historical cost methods

Specific identification method

FIFO

LIFO

Average price

Weighted Average Price Adjusted selling price

Inventory Record System:There are two systems of determining the physical quantities and monitory value of inventories sold and in hand. Those are 1. Periodic Inventory System 2. Perpetual Inventory System 1. Periodic Inventory System:- Periodic Inventory system is a method of ascertaining Inventory by taking an actual physical count of all the inventory items on hand at a particular date on which inventory is required. Periodic Inventory system is simple and less expensive than the perpetual system. 2. Perpetual Inventory System:- Perpetual Inventory system is a system of recording Inventory balances after each receipt and issue. Under this system, cost of goods issued is directly determined and stock of goods is taken as residual figure with the help of stock ledger in which flow of goods is recorded on continuous basis. The limitation of this system is cost.