a primary issue in accounting for inventories is the determination of the value at which inventories...
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Inventory Valuation
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Objective:
A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statements.
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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.
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Classification of Inventories
Raw Materials
Stores and Spares
Work in Progress
Finished Goods
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Inventory Control
Procurement
Storage
Maintenance
Use
Handling
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Aim of Inventory Control
Execution of production schedule
Timely availability of right kind of material
At right production location
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Process of purchase
Setting the specification(Quality parameters)
Inviting Bids(selection of vendor)
Placing the order
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Inventory Control ActivitiesReceiving
Quality Checking
Storage
Record Keeping
Issue
Stock audit
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Steps in Physical Verification of InventoryPreparation 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 itemCode number of itemQuantity Location Verification dateVerifiers’ name Signature of verifier
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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
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Bases of Inventory ValuationValue 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.
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System for Inventory Valuation
Perpetual /Continuous System
Periodic System
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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.
Date Receipts Issues Balance Qty Rate Amt. Qty Rate Amt. Qty Rate Amt.
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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.
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Methods of Inventory Issue pricing
First In First Out Method
Last In First Out Method
Simple Average Method
Weighted Average Method
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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.
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Cost of inventory:
Cost of purchase
Cost of conversion/production
Any other cost incurred for bringing the inventories to the saleable condition
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Cost of purchase:
Purchase cost includes :
Cost of inventory (R/M, WIP, Fin Goods)Purchase CommissionQuality testing costCarriage inwardTaxes levied on these items
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Cost of Conversion/ Production:
Cost of converting Raw material into semi finished or finished goods
Direct and indirect cost factory levelDirect and indirect material costDirect and indirect labourFixed as well as variable overheads
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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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e.g.Date Purchased
QtyRate /unit Date Issue qty
02/01/07 10,000 100 15/01/07 8,500
21/01/07 7,000 95 28/01/07 3,500
31/01/07 2,200 96 21/02/07 7,000
10/0207 800 100 02/03/07 800
15/03/07 6,200 101 29/03/07 4,400