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Inventory Valuation Methods Explained

The document discusses various methods for valuing inventory held by a business. It explains that accurate inventory valuation is important for determining a business's income and financial position. It then describes different inventory systems - periodic and perpetual - and several methods for assigning costs to inventory - specific identification, FIFO, LIFO, HIFO, NIFO, WAPM. It notes advantages and disadvantages of some approaches. The objective is to determine the most appropriate method to value inventory for financial reporting purposes.

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Tufail Khan
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282 views20 pages

Inventory Valuation Methods Explained

The document discusses various methods for valuing inventory held by a business. It explains that accurate inventory valuation is important for determining a business's income and financial position. It then describes different inventory systems - periodic and perpetual - and several methods for assigning costs to inventory - specific identification, FIFO, LIFO, HIFO, NIFO, WAPM. It notes advantages and disadvantages of some approaches. The objective is to determine the most appropriate method to value inventory for financial reporting purposes.

Uploaded by

Tufail Khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

INVENTORY VALUATION

SUBMITED BY:Tufail khan

MEANING OF INVENTORY
HELD FOR IN THE ORDINARY COURSE OF BUSINESS IN THE PROCESS OF PRODUCTION FOR SUCH SALE IN THE FORM OF MATERIALS OR SUPPLIES TO BE COSUMED IN THE PRODUCTION PROCESS OR RENDERING OF SERVICES

OBJECTIVE OF INVENTORY VALUATION

Determination of income Determination of financial position

DETERMINATION OF INCOME
It is done to determine the true income earned by buisness during particular period. Cost of goods is determined by adding openinig inventory to deduducting closing inventory from purchase.

DETERMINATION OF FINANCIAL POSITION


In case the inventory is not properly valued, the balance sheet will not disclose the correct financial position of the buisness.

INVENTORY SYSTEM
.Periodic inventory system .Perpetual inventory system

PERIODIC INVENTORY SYSTEM


A system of inventory accounting where the quantity/value of inventory is found out only at the end of the accounting periodic after having a physical verification of the units in hand.

Perpetual inventory system


A method recording inventory balances after every reciept and issue to facilitate regular checking and to obviate down for stocking.it is also known as automatic inventory system.

METHODS OF VALUATION
Specific identification method FIFO LIFO HIFO NIFO WAPM

SPECIFIC IDENTIFICATION METHOD


According to this method each item of inventory is identified with its cost,the total of varous costs so identified constitutes the value of inventory. This technicue of inventory valuation can be adobted only by a company which is handling small no. of items.

FIFO
Under this method , it is assumed that materials/goods first to issued or sold.

ADVANTAGE
It values stock nearer to current market prices since stock is presumed to be consisting of the most recent purchase

DISADVANTAGE
It invoves complicated calculations and hence inceases the possibility of clerical errors

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

ADVANTAGE
It takes into the current market conditions while valuing materials issued to different jobs or calculating the cost of goods sold.

HIFO
The inventory of this materials or goods should be at the lowest possibile prices

BASE STOCK METHOD


The method based on the contetion that each anterprises maintain at all times are min. quantity of material or finished goods in its stock this quatity is termed as the best stock.

NIFO
The method attempts to value materials issued or goods sold at an actual prices which is the nearest possible to the market price.

WAPM
This method is based on the presumption that once the materials or goods are put into a common bin,the lose the separate identity

NET RELISABLE VALUE


According to internationl accounting standard the, it means that estimated selling price in the ordinary course of buisness less cost of completion and less cast necessarly in order to make the sale.

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