Presented By…. Munna Shaikh

Narendra Pandey

Anurag Gupta

Sagar Chhabria

Nikhil Rupla

Nivedita Singh

Objectives

Meaning of accounting policies

Considerations in selection of Accounting Policies

Disclosure of Accounting Policies

Fundamental Accounting Assumptions

Deviations in Accounting Assumptions

To promote better understanding of Financial Statement by establishing through an accounting standard:

• The Disclosure of Significant Accounting Policies, and

• The Manner of their disclosure

Meaning of Accounting Policies

Accounting policies refer to specific accounting principles and the method of applying those principles adopted by the enterprises in preparation and presentation of the financial statement.

Primary consideration in selection of accounting policies is that it should reflect a true and fair view

For this purpose, use the canons of :

• Prudence

• Substance over form

• Materiality

PRUDENCE

Where uncertainty attached to future events,

• Anticipate no profits

• Provide for all possible losses and liabilities even if amount cannot be determined with certainty

SUBSTANCE OVER FORM

The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form

MATERIALITY

• FS should disclose all 'material' items,

• Item is regarded material if knowledge of it might influence the decisions of the user of the financial statements.

For proper and better understanding of financial statement, it is required that all significant accounting policies followed in preparation of financial statement should be disclosed. Because assets and liabilities in balance sheet and profit and loss account are significantly affected by accounting policies followed.

1. Going Concern

2. Consistency

3. Accrual Concept

• Enterprise normally viewed as a going concern,

• It means continuing in operation for the foreseeable future.

• Assumed that enterprise has no intention/ necessity of liquidation or of curtailing materially the scale of the operations.

It is assumed that accounting policies are consistent from one period to another.

• Revenues recognised as they are earned

• Costs are recognised when incurred

• Receipt or payment of money has no relevance

• Revenues and costs recorded in the period to which they relate

If above assumptions followed - No specific disclosure is required.

If above assumptions not followed, the fact should be disclosed

Objectives

Definition

Measure of inventories

Determination of Cost of Inventories

Determination of net realizable value of Inventories.

Comparison between the cost and net realizable value

Methods of computing Inventories

Disclosure in financial statements

Objective of Accounting Standards

The basic objective of accounting standards is to remove variations in the treatment of several accounting aspects and to bring about standardization in presentation

The ACCOUNTING STANDARDS BOARD (ASB) which functions under ICAI issues accounting standards

ObjectiveValuation of Inventories

Formulate the method of computation of cost of inventories/stock.

Determining the value of closing stock at which it is to be shown in balance sheet till it is not sold and recognized as revenue.

Definition Inventories are assets:

Held for the sale in the ordinary course of business (Finished Goods).

In the process of production of such sale (Raw material and working progress).

In the form of materials and supplies to be consumed in the production process or in the rendering of services (Stores, Spares, Raw material).

Inventories do not include machinery.

Measure Of InventoriesInventories should be valued at the lower of cost and net resale value

MAJOR POINTS FOR VALUATION OF INVENTORIES

Determination of cost of Inventories

Determination of net realizable value of inventories

Comparison between the cost and net realizable value

Determination of Cost of Inventories

Cost of Inventories Includes:

Cost of Purchase

Cost of Conversion

Other Costs

Cost Of Purchase Cost of Purchase Price includes :

• Duty and Purchase Price

• Taxes

• Freight Inward

• Other Expenditure directly attributable to the acquisition.

Less :

• Duties and taxes recoverable by enterprises from taxing authorities

• Trade discount

Example

Purchase Price 100 x 10 1000

Less : Trade Discount -100

Net Price 900

Add : Sales Tax +36

Less : Refundable Duties -100

Add : Transportation & Loading Chg +50

Total Cost of Purchases 886

Cost of Conversion

Includes cost directly related to units of production

E g. Direct labour , Direct expenses , production overheads

Overheads are classified as fixed and Variable overheads that are incurred in converting material into finished goods.

Other Costs Cost incurred in bringing the inventories to their present location and condition

Excise duty contributes directly to bringing the inventories to its present location and condition

Excise duties is direct costs, which should be included in the valuation of inventories

Exclusion From Cost of Inventories

Abnormal amounts of wasted materials,labour or other production cost

Storage cost unless they are necessary inthe production process

Administrative cost

Selling & distribution cost

Determination of netrealizable value of Inventories.

Net realizable value means

Estimated selling price - Estimated cost - Estimated costs

in ordinary course of of completion necessary to make

business sale

If the finished product is sold at cost or above cost, then the estimated realizable value of raw material and supplies is considered more than its cost.

If the finished product is sold below cost, then the estimated realizable value of raw material or supplies is equal to replacement price of raw material or supplies.

Comparison between the costand net realizable value

The comparison between the cost and net realizable value should be made by

grouping the items.

Item Historical NRV Valuation

X 20000 30000 20000

y 12000 10000 10000

Z 28000 26000 26000

A 12000 18000 12000

Example of comparison

Methods of computing Inventories

First-in, First-out (FIFO)

Last-in, First-out (LIFO)

Weighted-average cost (WAC)

First-in, First-out (FIFO)

This method assumes that inventory purchased first issold first. Therefore, inventory cost under FIFOmethod will be the cost of latest purchases. Considerthe following example:

ExampleBike LTD purchased 10 bikes during January and sold 6 bikes, details of which are as follows:January 1 Purchased 5 bikes @ $50 eachJanuary 5 Sold 2 bikesJanuary 10 Sold 1 bikeJanuary 15 Purchased 5 bikes @ $70 eachJanuary 25 Sold 3 bikesThe value of 4 bikes held as inventory at the end of January may be calculated as follows:The sales made on January 5 and 10 were clearly made from purchases on 1st January. Of the sales made on January 25, it will be assumed that 2 bikes relate to purchases on January 1 whereas the remaining one bike has been issued from the purchases on 15th January. Therefore, the value of inventory under FIFO is as follows:

SolutionDate Purchase Issues Inventory

Units $/Units $ Total Units $/Units $ Total Units $/Units $ Total

Jan 1 5 50 250 - - - 5 50 250

Jan 5 -- - - 2 50 100 3 50 150

Jan 10 - - - 1 50 50 2 50 100

Jan 15 5 70 350 - - - 5 70 350

Jan 15 - - - - - - 7 - 450

Jan 25 - - - 2 50 100 - - -

1 70 70 4 70 280

As can be seen from above, the inventory cost under FIFO method relates to the cost of the latest purchases, i.e. $70

Last-in, First-out(LIFO)

This method assumes that inventory purchased last is sold first. Therefore, inventory cost under LIFO method will be the cost of earliest purchases. Consider the following example:-

ExampleBike LTD purchased 10 bikes during January and sold 6 bikes, details of which are as follows:January 1 Purchased 5 bikes @ $50 eachJanuary 5 Sold 2 bikesJanuary 10 Sold 1 bikeJanuary 15 Purchased 5 bikes @ 70 eachJanuary 25 Sold 3 bikesThe value of 4 bikes held as inventory at the end of January may be calculated as follows:The sales made on January 5 and 10 were clearly made from purchases on 1st January. However, all sales made on January 25 will be assumed to have been made from the purchases on January 15. Therefore, the value of inventory under LIFO is as follows:

SolutionDate Purchase Issues Inventory

Units $/Units $ Total Units $/Units $ Total Units $/Units $ Total

Jan 1 5 50 250 - - - 5 50 250

Jan 5 - - - 2 50 100 3 50 150

Jan 10 - - - 1 50 50 2 50 100

Jan 15 5 70 350 - - - 5 70 350

Jan 15 - - - - - - 7 - 450

Jan 25 - - - 3 70 210 2 50 100

2 70 140

4 - 240

Weighted average Cost (WAC)

This method assumes that the goods available for the sale are homogeneous

The average cost is computed by dividing the cost of goods available for sale by the number of the units available by sale. Consider the following example:-

ExampleBike LTD purchased 10 bikes during January and sold 6 bikes, details of which are as follows:January 1 Purchased 5 bikes @ $50 eachJanuary 5 Sold 2 bikesJanuary 10 Sold 1 bikeJanuary 15 Purchased 5 bikes @ 70 eachJanuary 25 Sold 3 bikesThe value of 4 bikes held as inventory at the end of January may be calculated as follows:All issues of inventory will be assumed to carry the average cost of all purchases up to the date of the issue. Average cost will be calculated by dividing total units of inventory by the total cost.

SolutionDate Purchase Issues Inventory

Units $/Units $ Total Units $/Units $ Total Units $/Units $ Total

Jan 1 5 50 250 - - - 5 50 250

Jan 5 - - - 2 50 100 3 50 150

Jan 10 - - - 1 50 50 2 50 100

Jan 15 5 70 350 - - - 5 70 350

Average Cost of Inventory 7 64.28 450

Jan 25 - - - 3 64.28 192.85 4 64.28 257.14

Average cost of inventory changes every time a purchase is made at a different price. Therefore the average cost of inventory changed from $50 to $64.286 after the

purchase on January 15

ExampleGlucose Labs manufactures glucose for use in medicine. On 1 December 2012, the company had 5 tons of sucrose (which is a raw material) costing $5,000, during the month it purchased 200 tons for $220,000, 3 tons remained at the year-end costing $3,000. Its labor cost amounted to $10,000 while its overheads were $15,000. Work-in-process inventory on 1 December 2012 was worth $10,000 while the work-in-process inventory as at 31 December 2012 was $8,000. Finished goods inventory as at 1 December 2012 was $25,000 while cost of goods sold for December amounted to $240,000. Find the finished goods.

Solution:Finished goods produced = opening raw materials inventory ($5,000) + raw materials purchased ($220,000) − closing raw materials inventory ($3,000) + labor ($10,000) + overheads ($15,000) + opening work in process inventory ($10,000) − closing work in process ($8,000) = $249,000Finished goods at the end of a period = finished goods at the start of period ($25,000) + finished goods produced ($249,000) − finished goods sold ($240,000) = $34,000.

Disclosure in financial statements

Accounting policy adopted in measuring inventories

Cost formula used

Classification of inventories like Finished Goods, WIP, Raw Materials, Spare Parts.