Day-21

Inventory Valuation
Inventory or stock is one largest
assets of a business concern. So
the inventory should be
properly compiled are recorded
in the books of account for
proper measurement and
inclusion in the Balance sheet.
Objectives of Inventory Valuation
a) Determination of true income--- The
Valuation of inventory is necessary for
determining the true income earned by a
business during a particular period.
b) Determination of financial position----
The inventory at a end of a period is to be
shown as a current asset in the balance
sheet of the business.
 Valuation Basis
Valuation of inventory is made on a conservative
basis,
i.e. expected profit is not to be considered whereas
possible losses are to be provided for. As such,
Inventories are valued at lower of the cost and
net realisable value. This is the age – old
principal of valuation of current assets.
Net Realisable Value= Estimated selling price-
Estimated cost to complete the sale.
Three important aspects of inventory Valuation are----
 Measurement of cost,
 Measurement of net realisable Value,
 Compression between the cost and net realisable
Value,
Measurement of cost
Cost of inventories comprise of-------
 Cost purchases:
 Cost of Conversion and
 Other costs incurred in bringing the inventories to
there present location and condition.
 Cost of Purchases
Cost of purchases, means purchase price
inclusive of Taxes and Duties, transport,
handling, and other costs directly
attributable to the acquisition of finished
goods, Materials or service.
Trade discount rebates and other similar
items are deducted while determining the
cost of purchase.
 Example
ABC Ltd purchased 1000 units of raw
materials @Rs. 100 per unit less 10% trade
discounts. Control Sales tax is Chargeable @
2% on the net price. The Excise duty
element included in the product is Rs. 10 per
unit against which CENVAT credit can be
claimed. The Company spend Rs. 1000, on
transportation and Rs. 500 for loading and
unloading. So the cost of purchased may be
arrived at as follows:
 Particulars Rs.
Purchase price (1000 x 100) 10000
Less; Trade Discount 1000
Net Price 9000
Add; Central sales tax @ 2% 1800
Net Price including sales tax 91800
Less; CEN VAT Credit 1000
Add; Transportation charge 1000
Add; Loading unloading charge 500
Cost of purchases 92300
Treatment of other costs
Other costs are included in the inventories to
the extend they are incurred for bringing
the inventories to there present location and
condition.
Methods of inventory Valuation
There are several methods like FIFO, LIFO, Weighted
Average Method etc. for valuation of inventories. But
In practical field, two method are mostly used (a) First
In First out(FIFO) Method and (b) Weighted Average
Method.
FIFO Method___
Under this method, it is assumed that the First item
Purchased is the first item sold.
Advantages____
a)It is based on cost and therefore no unrealized profit enters
Into the financial accounts of the company.
b) It values stock nearer to current market prices.
Disadvantages_______
a) It involves complicated calculations and hence increases
the possibility of clerical errors.
Example_____
Item D has been purchased in four lots and has been issued
In four lots.
Purchases sales
Lot No.1-1500unit@Rs.10p.u LotNo.1-1400
Lot No.2-3000unit@Rs.12p.u LotNo.2-2700
Lot No3-2400unit@Rs24p.u Lot No.3-1700
LotNo4-2000 unit@Rs20p.u Lot No.4-2500

Each lot was issued after the purchase of the

lot bearing the same number.
Solution
Stores Ledger Account
FIFO Method___
 Name of Material Folio No.
Specification Maximum level
Code no. Bill no. Minimum level
Unit of measurement Location Re-Order level
Issues
Balance
Lot Receipt

GRN Qty Rate Rs. SR Qty Rate Rs. Qty Rate Rs.
No. No.
Lot 1 1500 10 15000 1500 10 15000
1400 10 14000 100 10 1000
Lot 2 3000 12 36000 100 10 1000
3000 12 36000
100 10 1000 400 12 4800
2600 12 31200
Lot 3 2400 24 57600 400 12 4800
2400 24 57600
400 12 4800 1100 24 26400
1300 24 31200
Lot 4 2000 20 40000 1100 24 26400
2000 20 40000
1100 24 26400 600 20 12000
1400 20 28000