Inventory Valuation

1. Inventory Valuation

2. Objective: • A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements.

3. What is Inventory? • Inventory are the tangible property of a firm • Held for resale or to be consumed in the production of goods or services for sale. • Regular income is generated by selling of these inventories. • Their valuation and proper recording is important task.

4. Classification of Inventories • Raw Materials • Stores and Spares • Work in Progress • Finished Goods

5. Inventory Control • Procurement • Storage • Maintenance • Use • Handling

6. Aim of Inventory Control • Execution of production schedule • Timely availability of right kind of material • At right production location

7. Process of purchase • Setting the specification(Quality parameters) • Inviting Bids(selection of vendor) • Placing the order

8. Inventory Control Activities • Receiving • Quality Checking • Storage • Record Keeping • Issue • Stock audit

9. Steps in Physical Verification of Inventory • Preparation of stock taking instruction (used by verification staff) • Sub division of inventory items into different groups • Preparation of inventory tags (with serial no.) • Name of inventory item • Code number of item • Quantity • Location • Verification date • Verifiers’ name • Signature of verifier

10. Preparation of item wise consolidated inventory sheets • Reconciliation of physical count/quantity with the quantity disclosed by accounting records • Finding out the discrepancy, if any and recounting • If discrepancy still persist :Reporting discrepancy to higher management • Shortage as disclosed and untracked stock as either normal or abnormal wastage

11. Bases of Inventory Valuation • Value of unsold stock – Cost or market Price whichever is less (Conservative Principle) • Different methods of valuation of Inventory. • One method suitable for a particular situation may not be suitable for another. • When a method is chosen, it is advisable to continue such method consistently from year to year.

12. System for Inventory Valuation • Perpetual /Continuous System • Periodic System

13. Continuous System • Stock register is maintained on an ongoing basis • Every purchase and issue/sales of the inventory - entered in this book as it takes place • Cost of items consumed/ sold, cost of remaining inventory.

14. Periodic System • No stock register is maintained. • Valuation of closing inventory is done at the end of a particular period. • Entry of each and every receipt and issue is not maintained on ongoing basis.

15. Methods of Inventory Issue pricing • First In First Out Method • Last In First Out Method • Simple Average Method • Weighted Average Method

16. Scope of Accounting Standard – 2 • Applies to all types of Inventories except: • Work in Progress arising out of construction contracts • Work in Progress arising in the ordinary course of business of service providers • Shares, debentures and other financial instruments • Live stock, agricultural and forest products.

17. Cost of inventory: • Cost of purchase • Cost of conversion/production • Any other cost incurred for bringing the inventories to the saleable condition

18. Cost of purchase: • Purchase cost includes : • Cost of inventory (R/M, WIP, Fin Goods) • Purchase Commission • Quality testing cost • Carriage inward • Taxes levied on these items

19. Cost of Conversion/ Production: • Cost of converting Raw material into semi finished or finished goods • Direct and indirect cost factory level • Direct and indirect material cost • Direct and indirect labour • Fixed as well as variable overheads

20. Inventory valuation rules: • Finished goods - To be valued at lower of cost or market value • Raw Material - To be valued on FIFO or weighted average method

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