S9,10 Valuation of Inventory

7/30/2019 S9,10 Valuation of Inventory

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Valuation of Inventory

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Session Agenda

Definition of Inventory

Measurement of Inventory

Components of cost

Net realisable value

Cost formula

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I. Inventories

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.

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Examples of Inventory for Retail Stores

Shirt, Jeans etc. for WESTSIDE

Nokia handsets for Nokia Priority Dealer

Fruits, Grocery items etc. for Reliance Fresh

LCD, TV etc. for CROMA

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II. Measurement of Inventories

Inventories should be valued at the lower of cost and net

realisable value.

Cost of Inventories

The cost of inventories should comprise all costs of

purchase, costs of conversion and other costs incurred inbringing the inventories to their present location and

condition.

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a. Component of cost

i. Cost of Purchase

a. Invoice Price

b. Transport inwards + insurance (if borne by buyer)

c. Any other incidental expensesd. Less subsidy/cost borne by any other person

ii. Cost of Conversion

iii. Other Costs

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Contd.

For example at a company's year end, if an unfinished

good that already cost Rs. 25 is expected to sell for

Rs.100 to a customer, but it will take an additional Rs.20to complete and Rs.10 to advertise to the customer, its

NRV will be

NRV = Rs.100 - Rs.20 - Rs.10 = Rs.70 > Rs. 25

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In this year's balance sheet, since the cost of the good

(Rs.25) is less than its NRV (Rs.70), the cost of the goodwill get recorded as the cost of inventory.

In next year's income statement after the good was sold,

this company will record a revenue of Rs.100, Cost of

Goods Sold of Rs.25, and Cost of Completion and

Disposal of Rs.20+Rs.10 = Rs.30. This leads to a profit of

Rs.100-Rs.25-Rs.30 = Rs.45 on this transaction.

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Cost Formulas

Specific identification

FIFO

LIFO

Weighted Average

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Inventory of eggs with a Restaurant

Purchased 2000 units @ Rs.2.50 per unit on March 1

Sold 1000 units @ Rs. 3.50 per

unit on March 11

Purchased 3000 units @ Rs.1.50 per unit on March 19

Sold 2500 units @ Rs. 2.50 perunit on March 21

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Fruit Store

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Art Gallary

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Furniture

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Specific identification

According to this method each identified items ofinventory is assigned specific cost and hence the namespecific identification.

In simple words cost is attributed to each item in theinventory individually that is identifiable specifically.

Here the point is to be noted that each item of inventorymust be identifiable otherwise specific assignment ofcost will not be possible.

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FIFO, LIFO, Weighted Average

However, when inventory items are not heterogeneousare are ordinarily interchangeable i.e. have similarnature and use then inventory at the year is usuallyvalued using a particular cost assumption

formula like First-in, First-out (FIFO) or Last-in, First-out (LIFO).

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Another alternative method for inventory valuation

is weighted average method which averages the value of

inventory held at the start of the period and value of

inventory purchased or produced during the period.

AS 2 allows the use of specific identification method, FIFO

method and weighted average cost method to value ending

inventory.

Its up to the management of the entity select the method of

inventory valuation by considering relevant factors.

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FIFO

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LIFO

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Weighted Average

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Class Exercise

Opening Inventory @ Rs. 12 per unit

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Class Exercise

Calculate the cost of material consumed for the period

using

FIFO

LIFO

Weighted Average

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FIFO

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LIFO

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Weighted Average

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Comparing 3 Methods

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Details Of Component X

Units Rate

Opening Balance 50 10

Purchase 1 100 10.1

Purchase 2 150 10.2

Consumption 1 100

Purchase 3 50 10

Consumption 2 100

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Class Exercise

Calculate the cost of material consumed for the period

using

FIFO

LIFO

Weighted Average

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S9,10 Valuation of Inventory