FINANCIAL ACCOUNTING-Inventory

TRINITY INSTITUTE OF PROFESSIONAL STUDIES

Sector – 9, Dwarka Institutional Area, New Delhi-75Affiliated Institution of G.G.S.IP.U, Delhi

B.COM(H)FINANCIAL ACCOUNTING

888101

BY: Ms. NAMRATA YADAV

TRINITY INSTITUTE OF PROFESSIONAL STUDIESSector – 9, Dwarka Institutional Area, New Delhi-75

INVENTORY VALUATION

• The term inventory complete means a complete list of goods that a business has for sale at a given time. But in accounting , the inventory includes even those goods that are in various stages of production that is , work –in-progress.

• According to AS-2 (Revised) , issued by ICAI, Inventories are assets:

(a) Held for sale in the ordinary course of business(b) In the process of production for such sale(c) In the form of materials or supplies to be consumed in the

production process or in the rendering of services


OBJECTIVE OF INVENTORY VALUATION

• Inventory is generally the largest of the current assets held by a trading or manufacturing enterprise. It is one of the major assets that affects efficiency of operations. Both, excess of inventory and its shortage affects the productive activity. Thus the objective of inventory valuation are:

• EFFECT ON LIQUIDITY

• EFFECT ON INCOME STATEMENT

• EFFECT ON BALANCE SHEET


INVENTORY SYSTEMS

INVENTORY SYSTEMS

PERIODIC INVENTORY SYSTEM

PERPETUAL INVENTORY SYSTEM


INVENTORY SYSTEMS

• PERIODIC INVENTORY SYSTEM : this system requires a physical count of all the inventory items on hand at specific times. The calculation of ending inventory on hand is done by taking an actual physical count at the end of an accounting period and then quantity on hand is multiplied by the cost per unit.

• BENEFITS :(a) It is less expensive(b) All corrections ensure accuracy of the inventory figure

shown in the accounts


PERIODIC INVENTORY SYSTEM

• DRAWBACKS:(a) It is assumed that inventory not accounted or traceable have

been sold or used. These are included in the cost of goods sold.

(b) Physical counting would adversely affect normal business operations for number of days.

(c) It would be expensive to obtain inventory figures by physical count if it is required frequently than once a year.



• The perpetual inventory system requires continuous updating with each purchase or sale transaction. A separate account for each type of inventory is maintained in a card or sheet to record the purchase and sale of each inventory item throughout the year. The system is integrated in accounting records by maintaining usual ledger accounts for each inventory item. The use of perpetual inventory method does not eliminate the need for a physical count and valuation.

BENEFITS: (a) It obviates need for stock taking by actual count at the end of

financial period.



• This method is helpful when inventory is in large volume.• It requires special staff so greater skill is built up.• Controlling losses is easier in this method.• There is no sudden ‘out of stock’ situation leading to

customer dissatisfaction.• DRAWBACKS: (a) It is costly to maintain this method.(b) It is quite elaborate.


METHODS OF INVENTORY VALUATION


FIRST IN FIRST OUT METHOD

• It is based on the assumption that the goods which are received first are issued first. This assumption is made for the purpose s of assigning costs and not for the purposes of the physical flow of goods. The physical flow of goods therefore, need not necessarily coincide with the pattern of cost flow assumption.

• Cost of material issued represents the cost of earlier purchases.

• Cost of closing stock represents the cost of latest purchases.


LAST IN FIRST OUT (LIFO) METHOD

• It is based on the assumption that the goods which are received last are issued first. This assumption is made for the purposes of assigning costs and not for the purposes of the physical flow of goods. The physical flow of goods therefore, need not necessarily coincide with the pattern of cost flow assumption.

• Cost of material issued represents the cost of latest purchases.

• Cost of closing stock represents the cost of earlier purchases.


WEIGHTED AVERAGE PRICE METHOD

• It is based on the assumption that each issue of goods consists of a due proportion of the earlier lots.

• It uses a weighted average price for pricing the issue of materials until a new lot is purchased when a new weighted average price will be calculated.

• Weighted Average Price = Total cost of materials in stock Total quantity of material in stock• It is useful when the quantity of materials in each lot

purchased is not uniform.

Education

FINANCIAL ACCOUNTING-Inventory