University School of Business

DEPARTMENT - MBA
Master of Business Administration
Financial Reporting and Analysis 22BAT- 602

Faculty Name: Ms. Reepu

(Assistant Professor)

Topic: INVENTORY DISCOVER . LEARN . EMPOWER

VALUATION
 INVENTORY
VALUATION

Course Outcome
CO1 To understand the format and content of the three basic financial statements
CO2 To integrate the information obtained from financial statements for assessing the
financial performance of a business organization
Will be covered in this
lecture
CO3 To examine the financial stability and growth of business organizations using financial
statement analysis techniques

CO4 To assess the quality of financial reports after detecting the manipulations in the
financial statements

CO5 To facilitate decision making on the basis of quality of financial reports

2
Meaning of Inventory
• Inventory is tangible property to be consumed in
production of goods or services or held for sale in the
ordinary course of business.

Inventories are unconsumed or unsold goods purchased

or manufactured
Inventories generally constitute the largest current
assets of manufacturing firms.

3
Definition
According to Accounting Standard (AS) – 2
(Revised)

Inventories are “assets:

•a) held for sale in the ordinary course of business;
•b) in the process of production for such sale; or
•c) in the form of materials or supplies to be consumed in the
production process or in the rendering of services.”

4
Types of Inventories
1. Finished goods: – Purchased or – Produced completely but remaining
unsold
2. Work-in-progress (work-in-process): – Units introduced into the
production process but are yet to be completed.
3. Raw Materials, Components, Stores and Spares: – Raw materials -
goods that are yet to be introduced into the production process. –
Stores and spares - factory supplies such as coolants, cleaning material,
and machinery spares.

5
Objectives of Inventory Valuation

1. Determination of true income – The matching process

requires closing inventory to be deducted from the cost of
goods available for sale (COGAS) to determine profits for an
accounting period
2. Determination of true financial position – Inventory is
shown as a current asset in the balance sheet, at the end of
the accounting period

6
Inventory valuation and matching principle

According to Matching principle, the expenses during an accounting period

should match the income earned during the accounting period.
Since goods are continuously bought and sold, the amount of inventories that
should be carried forward to the next accounting period should be determined
so that the current years revenue is matched with the current years cost of
goods sold.

Cost of Goods sold = Opening stock + Purchases – Closing stock

7
Effect of errors in valuation of inventories.

If there is an error in valuation of inventory

• it will affect not only the current years profits
• but also the next years profit because the closing stock of current
year is the opening stock of next year.

8
Valuation of inventories
As per generally accepted accounting principles, inventories should be
valued at cost.
Cost refers to cost of acquisition plus cost of conversion.

Raw materials, Stores, spare parts, consumables etc

= cost of acquisition i.e purchase costs including duties and taxes,
freight and other expenses directly related to such purchases.
Similarly any discounts , rebates on such purchases should be
reduced.

9
Finished goods in case of manufacturing concern =

Cost of raw materials plus cost of conversion of raw materials into finished goods .

It consists of direct expenses like labour costs as well as indirect manufacturing costs
like power. Water , fuel, factory rent , factory insurance etc directly attributable to
production / manufacturing.

Indirect expenses like salaries, office expenses etc. are not included since they are
period costs.

10
Work in process =

WIP is valued at cost as above depending upon the stage of

completion of labour and overheads which is determined by the
production department.

11
Inventory systems
• The principal systems for determination of physical
quantities and the valuation of inventory
• Types:
• 1. Periodic inventory system
• 2. Perpetual inventory system

12
Periodic inventory system
• Also known as “Annual Stock Taking”.
• Quantity and value of inventory determined only at the end
of the accounting period after taking a physical count of the
inventory.
• Also known as “Annual Stock Taking”.
• Cost of goods sold (COGS) is a residual figure and is
obtained as follows: COGS = Opening stock + total purchases
- closing stock

13
Periodic inventory system
• Advantage
• It is simple to understand
• Drawbacks
• Quantity and value of inventory not known on a continuous
basis
• No accounting is done for shrinkage, losses, theft, and
wastage – Assumes materials not in stock have been used

14
Perpetual Inventory System
• Also known as continuous inventory system
Records the balance of inventory after every receipt and issue to
facilitate regular checking and to avoid closing down the firm for stock-
taking
• Also known as continuous inventory system
• There is continuous physical stock-taking throughout the year and
physical stocks are verified and compared with the balances recorded
in stock registers (bin cards and stores ledger).

15
Perpetual Inventory System
• The closing inventory is calculated as a residual figure,
ascertained as follows:

Closing Stock = Opening Stock + Purchases– Cost of goods sold

16
Perpetual Inventory System
• Advantages
• Helps in preparation of Interim financial statements
• Regular checking and rigid control – Reduces the possibility of loss,
theft, stock shortages – Helps in identification of slow moving and
obsolete stock
• Avoids the suspension of business for stock taking as physical stocks
can be counted whenever desired.
Drawback
• Elaborate system - more expensive.

17
 Blackboard
Assessment Pattern

Components HT-1 HT-2 Assignment Surprise Test Business Quiz GD Forum Attendance Scaled
Marks

Max. Marks 10 10 6 4 4 4 2 40

18
 References

•Reference book- Maheshwari S.N, Accounting for Management, Vikas Publishing House, New Delhi,2010
•Reference Website: https://www.accountingtools.com/articles/users-of-financial-statements.html
•Reference Journal for advance study: Journal of Accountancy (JOA)

19
THANK YOU

For queries
Email: reepu.usb@cumail.in