Inventory Valuation

1. Primary issue in Inventory valuation Primary issue is the value at which the inventories are carried in financial statements until the revenue is recognized, and includes the cost of inventory and any write down to net realizable value. 2. Definition of inventory 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. They encompass goods purchased and held for resale. Inventory arises because of Time lag between acquisition of goods and their disposition caused by transportation period, processing period and fluctuations in demand. It is a current asset and its recognition depends upon the ownership and not the physical possession of the goods. 3. Value of inventory Inventory is valued at lower of cost and net realizable value. (LCM) The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 4. 1. 2. 3. Purpose of inventory valuation To ascertain the income correctly To ascertain financial position and value of assets correctly To indicate clearly the liquidity position of the business

5. System of inventory valuation 1. Periodic system adopted at the end of the accounting period 2. Perpetual system adopted on a continuous basis in a chronological way. It essentially involves making of Stores Ledger Control Account.

6. 1. 2. 3. 4.

Cost ascertainment methods Specific identification method FIFO (First in First Out) LIFO (Last in First Out) WAVE (Weighted Average)

Dr. Deepak Sehgal / Associate Professor Commerce / DDUC

The method or formula used should reflect the fairest possible approximation to the cost incurred in bringing the inventory to its present location and condition. 7. Steps in valuation of inventory 1. Physically establish the inventory and recheck with stores ledger control account (in case of periodic system) or Calculate inventory as per stores ledger control account and recheck physically as well. 2. Calculate the cost of the inventory using methods in Para 6 above 3. Ascertain the Net Realizable value as defined in Para 3. 4. Calculate the lower of step 2 and 3 based either on individual or group basis but never on aggregate basis.

Questions 1. From the following particulars for the month of March, 2003, find out the cost of inventory on 31-3-2003 under perpetual system using FIFO method of pricing issue of materials : Date Particulars Quantity (kg.) 400 2,000 1,600 1,000 200 300 360 Rate per kg. 25 33 38 41 1-3-2003 Opening inventory 3-3-2003 Purchase of material 8-3-2003 Issue of material 13-3-2003 Purchase of material 20-3-2003 Issue of material 22-3-2003 Purchase of material 27-3-2003 Issue of material

Also show cost of different issues.[B. Com., Delhi 2003][CS(F) - June 2002 - Modified] 2. From the following data, calculate the value of closing inventory according to Last-in-First-out method on March 31, 2001, using : (i) Periodic inventory system (ii) Perpetual inventory system March 1 Stock in hand 400 units @ Rs. 7.50 each Purchases March 5 600 units @ Rs. 8 each March 15 March 25 March 30 Issues March 3 March 10 March 17 March 26 March 31 500 units @ Rs. 9 each 400 units @ Rs. 8.50 each 300 units @ Rs. 9.50 each 300 units 500 units 400 units 500 units 200 units

3. Find out from the following data for the year 2001 the cost of goods sold, closing inventory and profit under FIFO and LIFO methods of inventory valuation : January 1 Inventory 100 units at Rs. 3 each

Dr. Deepak Sehgal / Associate Professor Commerce / DDUC

January 31 February 28 March 31

Purchases Purchases Purchases

120 units at Rs. 4 each 110 units of Rs. 5 each 140 units at Rs. 6 each [B.Com. DelhiAdapted]

Sales for the period 400 units at Rs. 8 each. 4. A company, started on 1st January, 2001 purchased raw material during 2001 as stated below : January 2 800 kg @ Rs. 62 per kg February April July September November 26 13 10 18 29 1,200 kg 2,500 kg 3,000 kg 1,500 kg 1,000 kg @ Rs. 57 per kg @ Rs. 59 per kg @ Rs. 56 per kg @ Rs. 60 per kg @ Rs. 65 per kg

While preparing its final accounts on 31st December, 2001, the company had 1,300 kg of raw material in its godown. Calculate the value of closing stock of raw materials according to (i) First in First Out basis, (ii) Last in First Out basis, and (iii) Weighted Average basis. [B.Com. DelhiModified] 5. From the following data, calculate the cost of goods sold and closing inventory under FIFO, LIFO and weighted average cost method of inventory valuation : March 1 Stock in Hand - 500 units @ Rs. 10 Purchases March 3 March10 March18 March24 March30 500 units @ Rs. 11 1,000 units @ Rs. 12 600 units @ Rs. 10 500 units @ Rs. 12 400 units @ Rs. 13 Issues March March 2 9 400 units 500 units 900 units 500 units 600 units [B.Com.Adapted] 6. From the following information, determine value of stock by applying LCM principle on: (1) Aggregate Basis (2) Groupwise Basis (3) Itemwise Basis A. Ready made Garments (i) Children wears (ii) Ladies wears (iii) Gents wears B. Books (i) Text-Books (ii) General Books C. Decorative items 10,000 15,000 25,000 8,000 16,000 20,000 Historical cost 50,000 30,000 40,000 Net Realisable value 60,000 50,000 30,000

March 16 March 23 March 31

Dr. Deepak Sehgal / Associate Professor Commerce / DDUC

GUIDE TO ANSWERS 1. Cost of goods sold Rs. 68,080 [49,600+600+11,880]; Closing stock Rs. 58,220; 2. Periodic Rs. 2,250; Perpetual Rs. 2,500; 3. Cost of sales - FIFO Rs. 1,750; LIFO Rs. 1,960; Closing stock - FIFO Rs. 420 LIFO Rs. 210; Profit FIFO Rs. 1,450 LIFO Rs. 1,240; 4. FIFO Rs. 83,000; LIFO Rs. 78,100; Weighted Average Rs. 76,505; 5. Cost of goods sold - FIFO Rs. 32,100 LIFO Rs. 32,900 Weighted Average Rs. 32,529; Closing Stock - FIFO Rs. 7,600; LIFO Rs. 6,800; Weighted Average Rs. 7,171; 6. Aggregate Rs. 170,000; Item wise Rs. 153000; Group wise Rs. 164,000

Dr. Deepak Sehgal / Associate Professor Commerce / DDUC