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Chapter 8 - Inventory

This document discusses accounting and valuation of inventory under IndAS 2. It defines inventory as assets held for sale, in production, or as materials used in production or rendering services. The document outlines the importance of inventory for calculating gross profit and different inventory systems. It discusses methods for periodic and perpetual inventory, steps for inventory valuation including costing methods, and the requirement to value inventory at the lower of cost or net realizable value.

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55 views26 pages

Chapter 8 - Inventory

This document discusses accounting and valuation of inventory under IndAS 2. It defines inventory as assets held for sale, in production, or as materials used in production or rendering services. The document outlines the importance of inventory for calculating gross profit and different inventory systems. It discusses methods for periodic and perpetual inventory, steps for inventory valuation including costing methods, and the requirement to value inventory at the lower of cost or net realizable value.

Uploaded by

chandel08
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACCOUNTING &

VALUATION OF
INVENTORY
By: Dr. Chhavi Mehta
International Management Institute
Inventory
 IndAS 2 `Valuation of Inventories’

 What is inventory?
 Assets
 held for sale in the ordinary course of business;
 in the process of production for such sale; or
 in the form of materials or supplies to be consumed in the production process or
in the rendering of services.
 Inventories often constitute (except in case of a services company) a
significant portion of the total assets of a company
Importance

 Gross Profit = Sales – Cost of goods sold (COGS)

 COGS = Opening stock + Purchases – Closing stock


 COGS + Closing stock = Opening stock + Purchases

 Opening stock + Purchases = Goods available for sale

 Problem: How to apportion goods available for sale between ending inventory and
cost of good sold?
 Closing stock (inventories) – In Balance Sheet as current assets and in P&L as a
reduction in expenses
Inventory flow – Trading Organisation
Inventory flow – Manufacturing Organisation
Methods of Inventory Accounting

 Periodic inventory system


 Perpetual inventory system
Periodic Inventory System
 Keep record of receipts of goods
 At the end physical count of goods is undertaken to ascertain the value

of ending inventory
 Cost of goods sold

 Goods available for sale – Ending inventory


 Beginning inventory + Purchases – Ending inventory
Perpetual Inventory System
 Keep record of receipt as well as delivery
 At the end physical count of goods is undertaken to compare the
balance value of ending inventory
 Ending inventory
 Goods available for sale – Cost of goods sold
 Beginning inventory + Purchases – Cost of goods sold
Steps for Inventory Valuation
 Ascertain the quantity of ending inventory
 Ascertain the stage of completion and cost to be included in inventory
cost
 Allocate the cost to be allocated between ending inventory and cost of
goods sold
 Compare the cost of ending inventory with its net realizable value
Cost of Inventories

 Comprises of:
 Cost of purchase
 Costs of conversion
 Other cost incurred to bring inventories to their present location and
condition
Cost of Purchase
 Includes purchase price, import duties and other taxes, transport,
handling and other costs directly attributable to the acquisition
 Exclude taxes and duties which are subsequently recoverable from tax
authorities, trade discount, quantity discount and rebates etc.
Cost of Conversion
 Cost directly related to the production
 Systematic allocation of fixed and variable production overheads
 Costs not to be considered for valuation:
 Storage costs (unless necessary in the production process before further
production)
 Administrative overheads
 Selling and distribution overheads
Cost of Conversion

 Borrowing Cost
 Ifinventory takes substantial period to be ready for sale, borrowing cost
directly attributable are included
Costing Methods
 For identifying the cost:
 Specific identification
 First In First Out (FIFO)
 Last In First Out (LIFO)
 Weighted Average Method

 IndAS 2 permits use of specific identification, FIFO and Weighted


Average Cost Method
Specific Identification Methods
 Cost of inventories, that are not ordinarily interchangeable and can be
identified or for specific project
 Not practical when a large number of inventory items which are
interchangeable
 Some form of approximation is used  Formula used should reflect the
fairest possible approximation to the cost incurred
First in First Out (FIFO)
 Assumes that the items of inventory purchased or produced first are
consumed or sold first
 Items remaining in the inventory are those that were purchased or
produced recently
 In inflationary situations – Will result in higher closing stock and lower
cost of goods sold
FIFO
Last in First Out (LIFO)
 Assumes that the items of inventory purchased or produced recently are
consumed or sold first
 Items remaining in the inventory are those that were purchased or
produced first
 In inflationary situations – Results in lower closing stock and higher cost
of goods sold
Weighted Average Method
 Weighted average of the cost of similar items at the beginning of a
period and cost of similar item produced or purchased during the period
 Either on a periodic basis or for each shipment
Valuation of Inventory
 Inventories should be valued at the Lower of Cost and Net Realizable
Value (NRV)
 Reason:
 Assets should not be carried in balance sheet in excess of the amounts that the
entity expects to realise from their sale or use
 Don’t overstate Profit and Assets
Net Realizable Value (NRV)
 NRV = (Estimated selling price in the ordinary course of business) –
(Estimated cost of completion + Estimated cost to make the sale)
 Estimate based upon the most reliable evidence that may be available at the time
estimates are being made
 NRV is ascertained on an item-to-item basis rather than as a group
Net Realizable Value (NRV)

 Material are not written down below cost if the finished products in
which they will be used are expected to be sold above cost
 Replacement cost of the material may be the best measure of their net
realizable value
Steps in Inventory Valuation Process
 Ascertain the quantity of ending inventory
 Ascertain the stage of completion
 Ascertain cost
 Ascertain net realizable value
 Value the inventory at lower of cost and net realizable value
Disclosure
 Accounting policies adopted in measuring inventories, including the cost formula used
 Total carrying amount of inventories and its classifications appropriate to the entity –
Raw material, components, work-in-progress, finished goods, stores and spares, loose
tools
 Carrying amount of inventories carried at fair value less costs to sell
 Amount of inventories recognized as an expense during the period
 Amount of any write-down of inventories recognized as an expense in the period
 Amount of any reversal of any write-down that is recognized as a reduction in the
amount of inventories recognized as expense in the period
 Circumstances or events that led to the reversal of a write-down of inventories
 Carrying amount of inventories pledged as security for liabilities
Bajaj Auto Ltd – AR 2018-19
Thank You!

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