Accounting Standard -2

Valuation Of Inventories

Definition Of Accounting standards

Accounting standards are the policy documents issued by recognised expert regulating accounting body relations to various aspects of Measurement treatment presentation and disclosure of accounting Transaction and events

Purpose Of Accounting Standard

To standardize diverse accounting policies with a view to eliminate to extent possible imcomparablity of financial statement. To provide a standard policies valuation norms.

Profit Valuation
Every

business entity must account for stock at end of year stock comprises of

Manufacturer-{i.e. raw material,consumable etc} Trader-{i.e. merchandise or trading goods}

Basis of stock valuation

Cost

or net realizable value whichever is lower

Different interpretation of cost for inventory valuation

Elielbrical cost based method First in first out {FIFO} Last in first out {LIFO}

Average cost simple average and weighed average

Other methods
Standard

cost Adjusted selling price Latest purchase price

Methods of stock valuation

There are mainly two methods of valuation of inventory

First in first out

Under this method goods which are received first are issued first as such inventories comprise of latest purchase or manufacture and valuation will be at current cost

Advantages of FIFO
Simple to understand Easy to operate Useful method during period of falling price Logical method with reference to usage of goods Easily applied when inventory are not too large and prices are fairly steady

Disadvantages of FIFO
Not useful for large number of quantity During rising prices lower cost are absorted by production there by higher profits is reflected Comparison between two robs become difficult it the similar robs are charges with different prices.

Last in first out method {LIFO}

Goods

received out of latest lot are issued first i.e. reverse order of LIFO as such inventory valued at the oldest prices

Advantages
Simple

to understand Easy to operate Useful method during rising prices Easily applied when inventories are not too large and prizes are fairly steady

Disadvantages
In conditions of rising prices the inventories are undervalued During falling prices lower cost are absorbed by production with high inventory valuation Comparison between two jobs becomes difficult if the similar jobs are charged with different prices

ACCORDING TO REVISED AS TWO VALUATION OF INVENTORIES LIFO METHOD OF INVENTORY VALUATION IS NOT RECOMMENDED LIFO METHOD MAY BE FOLLOWED IN EITHER OF THE TWO WAYS
PERIODICAL {I.E. END OF SPECIFIED PERIOD } PERPETUAL {I.E. CONTINUOUS}

METHODS TO CALCULATE THE COST

AVERAGE

COST METHOD SIMPLE AVERAGE METHOD WEIGHTED AVERAGE METHOD

Simple average cost

It is calculated by adding different prices and there after dividing by total number

Weighted average method

Formula to calculate the average is Total cost of goods available for sale Total number of units available for sale

Advantages
Useful during period of heavy fluctuation of price clerical errors are reduced as issue is made at single price

Disadvantages

When frequency purchases are made more clerical work is involved Cost are average hence profit or loss reveals misleading result

Non historical cost

It does not consider the historical cost incurred to acquire the goods It includes adjusted selling price method standard cost and latest purchase price method

Adjusted selling price method

It is also called retail inventory method It is also widely in retail business or in business or where the inventory comprises of items the individual cost of which are not readily ascertainable

TECHNIQUES OF INVENTORY VALUATION

1.

2.

THERE ARE TWO TYPES OF INVENTORY VALUATION INVENTORY IS NOT ORDINARILY INTERCHANGABLE INVENTORY THAT CAN BE ORDINARILY INTERCHANGABLE

INVENTORY ORDINARILY INTERCHANGABLE

HISTORICAL COST METHOD

1 FIFO 2 LIFO 3 AVG COST METHODS

NON HISTORICAL COST METHOD

1 STANDARD COST 2 ADJUSTED SELLING PRICE 3 LATEST PURCHASE PRICE