VALUATION OF INVENTORIES

By
SURBHI KHANDELWAL(26)
POOJA RAUT(42)
ZEENAL SHAH(54)
RASHMI SINHA(60)
• To formulate the method of computation of
cost of inventories

• To determine value of closing stock

• To determine value at which the inventory is

to be shown in balance sheet
Assets:
• Finished Goods

• Raw material

• Work in Progress

• Stores

• Spares - ASI
Financial instruments

WIP under construction contracts

WIP of service providers

Livestock agricultural & forest products,

mineral oils, ore & gases
MEASUREMENT OF INVENTORIES

Valued at lower of
COST
or
Net Realizable Value.
Total inventory cost
Purchase price

Duties and taxes

Freight Inwards

Other expenses directly attributable

PURCHASE COST( continued..)
LESS:
• duties and taxes recoverable

• trade discount

• rebate

• duty drawback
Direct labour

Fixed production overhead

Calculated on normal capacity

Variable production overhead

Calculated on actual capacity
Joint Product
Allocated on rational and consistent basis

By product
NRV is deducted from cost of conversion
Administration costs

Sellingand distribution costs

Abnormal wastage

Storage costs

Interest and Borrowing Costs

Periodic System

Perpetual System
Actual physical count at a particular date

Cost of goods sold includes loss of goods

Cost of goods sold is determined as

Cost of goods sold = Opening inv + Purchases
– Closing inv (physically counted)
Recording inv after every receipt and issue
Physical stock should be checked
Costlier method
Based on book records
 FIRST IN FIRST OUT (FIFO)

Goods received first are issued first

Goods sold are of the previous slot and valued
at the price paid for that lot
Ending inventory is the latest lot valued at
price paid for lot
 Advantages of FIFO
• Value of the closing stock tends to be nearer to the market
price
• In case of falling prices, income tax liability is reduced
• No unrealized inventory profits/losses are made

Disadvantages of FIFO
• In case of rising prices, income tax liability is increased
• In a period of fluctuating prices, the cost of issue do not
represent current market prices
• Involves a lot of calculation work
 Date Receipts Issues Balance

  Quantity Rate (Rs) Amount (Rs) Quantity Rate (Rs) Amount (Rs) Quantity Rate (Rs) Amount (Rs)

01.01.2001 - - - - - - 100 1 100

02.01.2001 400 1.5 600 - - - 100 1 100

              400 1.5 600

03.01.2001 - - - 100 1 100 50 1.5 75

        350 1.5 525      

04.01.2001 500 2.06 1030 - - - 50 1.5 75

              500 2.06 1030

05.01.2001 - - - 50 1.5 75      

        250 2.06 515 250 2.06 515

Rs
A Opening Inventory 100
B Purchases: (Rs 600 + Rs 1030) 1630
C Cost of Goods Sold (Rs 100 + Rs 525 + Rs 75 + Rs 515) 1215
D Ending Inventory (A+B-C) 515
 LAST IN LAST OUT (LIFO)

• Goods received last are issued first

• Goods sold are the latest and valued at price
paid for that lot
• Ending inventory is the previous lot and
valued at price paid for the same
Advantages of LIFO
• Cost of issues tend to be nearer to the current market price
• In case of rising prices, income tax liability is reduced
• No unrealized inventory profit/loss is made

Disadvantage of LIFO

• Value of closing stock does not tend to be nearer to the

current market price
• In case of falling prices, income tax liability is increased
• Involves a lot of calculation work
 Date Receipts Issues Balance

  Quantity Rate (Rs) Amount (Rs) Quantity Rate (Rs) Amount (Rs) Quantity Rate (Rs) Amount (Rs)

01.01.2001 - - - - - - 100 1 100

02.01.2001 400 1.5 600 - - - 100 1 100

              400 1.5 600

03.01.2001 - - - 400 1.5 600 - - -

        50 1 50 50 1 50

04.01.2001 500 2.06 1030 - - - 50 1 50

              500 2.06 1030

05.01.2001 - - - 300 2.06 618 50 1 50

              200 2.06 412

Rs
A Opening Inventory 100
B Purchases: (Rs 600 + Rs 1030) 1630
C Cost of Goods Sold (Rs 100 + Rs 525 + Rs 75 + Rs 515) 1268
D Ending Inventory (A+B-C) 462
 SPECIFIC IDENTIFICATION
METHOD
• Requires a detailed physical account so as to
know exactly how many of each goods bought
on specific dates remained at year end
inventories
• Relates the ending inventory goods directly to
the specific price at which they were bought
for
• Allows management to easily manipulate the
ending inventory cost since they can report
that the cheaper goods were sold first, hence
increasing ending inventory cost and lowering
COGS
• Very hard to use on interchangeable goods
Weighted Average Price Method
• W = ____Total cost of goods in stock_____
Total quantity of goods in stock
Advantages:
1. It averages out the effect of price fluctuations.
2. Compared to FIFO or LIFO, this method is simpler.

Disadvantages:
1.This method involves more calculations as weighted average
price needs to be calculated on the receipt of new lot.
2. The value of closing stock may not be close to market value
 Adjusted Selling Price (or Retail
Inventory Method)
• Often used in retail trade for measuring
inventories of large numbers of rapidly
changing items that have similar margins.
• Cost of inventory = Sales value – appropriate
% gross margin.
• An average percentage is generally used.
 Standard cost Method
• A standard cost is set for each material and this
cost is used as a basis for pricing the material
issues.
• This method is often used to arrive at historical
cost for the purpose of inventory valuation.
• Advantages:
1. It is easy to operate
2. There is a reduction in clerical work as repeated
cost calculations are not required to be made on
the receipt of each new lot of materials.
• Disadvantages:
1. The cost of issues of materials and closing
stock do not reflect the current market prices.
2. the determination of standard cost becomes
very difficult when prices fluctuate frequently.
Net Realizable Value = Estimated - Estimated Costs
(NRV) Selling necessary to make
Price sale

Cost

Value of Inventory = the lower of

Net Realizable
Value

The valuation takes into consideration cost and selling

price fluctuations directly relating to events occurring
after the balance sheet date.
 GIVEN:
ITEM COST(Rs) ESTIMATED SELLING COST TO
PRICE(Rs) COMPLETE(Rs)
A 2.00 2.50 0.50
B 4.00 4.00 0.80
C 6.00 10.00 1.00
D 5.00 6.00 2.00
E 1.00 1.20 0.25

Determining Value of inventory:

ITEM COST(Rs) NRV(Rs)

A 2.00 2.50 - 0.50 = 2.00
B 4.00 4.00 - 0.80 = 3.20
C 6.00 10.00 - 1.00 = 9.00
D 5.00 6.00 - 2.00 = 4.00
E 1.00 1.20 - 0.25 = 0.95
• If finished product in which raw material and
supplies used is sold at cost or above cost,
then the estimated realisable value of raw
materials and supplies is considered more
than its cost
• If sold below cost then the estimated
realisable value of raw material or supplies is
equal to replacement price of raw materials
 METHODS OF COMPARISON
• Item by item method
• Group method
• Aggregate method
Financial statements should disclose the
following:
– Accounting policy adopted in measuring
inventories
– Cost formula used
– Classification of inventories
 IAS2
LIFO is also allowed here
Cost of inventories of a service provider
has been explained.
Disclosures: Accounting Policies ,cost
formula , Total carrying amount and
classification of inventories. Inventories
pledged as security for liabilities
AS2
Application of LIFO is not allowed.
This is missing from AS2
Inventories pledged as security for
liabilities is not included.
Last-In-First-Out (LIFO) method of stock valuation is
widely used.

Internal Revenue Services officially recognizes LIFO as

acceptable method for tax computation.

As per Indian GAAP LIFO method is not acceptable.

THANK YOU