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    Valuation of Inventory

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    REHANRAJ
    1. Inventory valuation is important for accurately assessing a company's liquidity, income, and financial position. 2. Common inventory systems include periodic inventory, which requires physical counts at set times, and perpetual inventory, which continuously updates inventory records with each transaction. 3. Popular inventory valuation methods include FIFO, LIFO, weighted average, and specific identification, each treating the cost of goods sold differently and thereby impacting reported income.

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    Valuation of Inventory

    Uploaded by

    REHANRAJ
    170 views10 pages
    1. Inventory valuation is important for accurately assessing a company's liquidity, income, and financial position. 2. Common inventory systems include periodic inventory, which requires physical counts at set times, and perpetual inventory, which continuously updates inventory records with each transaction. 3. Popular inventory valuation methods include FIFO, LIFO, weighted average, and specific identification, each treating the cost of goods sold differently and thereby impacting reported income.

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    VALUATION OF INVENTORY

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    1. Inventory valuation is important for accurately assessing a company's liquidity, income, and financial position. 2. Common inventory systems include periodic inventory, which requires physical counts at set times, and perpetual inventory, which continuously updates inventory records with each transaction. 3. Popular inventory valuation methods include FIFO, LIFO, weighted average, and specific identification, each treating the cost of goods sold differently and thereby impacting reported income.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    170 views10 pages

    Valuation of Inventory

    Uploaded by

    REHANRAJ
    1. Inventory valuation is important for accurately assessing a company's liquidity, income, and financial position. 2. Common inventory systems include periodic inventory, which requires physical counts at set times, and perpetual inventory, which continuously updates inventory records with each transaction. 3. Popular inventory valuation methods include FIFO, LIFO, weighted average, and specific identification, each treating the cost of goods sold differently and thereby impacting reported income.

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    of 10

    VALUATION OF

    INVENTORY
    Meaning of • The terms ‘inventory’ or ‘merchandise’ or ‘stock-in-
    trade’ means a complete list of goods that a business has

    Inventory for sale at a given time. But in accounting, the inventory


    includes even those goods that are in various stages of
    production, i.e, work-in-progress or work-in-process.
    • According to Accounting Standard(AS-2, revised),
    issued by ICAI, Inventories are assets : (a) held for sale
    in the ordinary case 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.
    • Inventories include goods purchased and held for resale,
    for example, merchandise(goods) purchased by a retailer
    and held for resale, computer software held for resale or
    land and other property held for resale.
    Objectives of
    Inventory 1. Effect on Liquidity : Short term creditors
    Valuation are interested in the liquidity position of the
    business enterprise and the general test for
    liquidity is the aggregated amount of
    current assets in relation to current
    liabilities. The proper valuation of
    inventories which constitute a major
    proportion of current assets is essential so
    that this item of current asset is not
    overstated so as to misstate liquid position
    of the business.
    2. Effect on Income Statement : The proper determination of income depends on
    the proper valuation of all assets – fixed and current. Since inventories are generally
    large and fluctuating in amount, the net income is influenced by the allocation of
    cost of fixed assets (i.e., depreciation accounting) and valuation method is used in
    determining the ending inventory.

    3. Effect on Balance sheet : As inventory is generally the largest of the current


    assets owned by a business entity, an error in the valuation of inventories may cause
    a misrepresentation of its financial position.
    • When ending inventory is overstated, net income
    Summary for the accounting period will be overstated.

    • When beginning inventory is overstated, net


    income for the accounting will be underrated.

    • When ending inventory is underrated, net


    income for the accounting period will be
    understated.

    • When beginning inventory is understated, net


    income for the accounting period will be
    overstated.
    Inventory I. Periodic Inventory System : This system
    requires a physical count of all the inventory items

    Systems on hand at specific times. The calculation of ending


    inventory on hand is done by taking an actual
    physical count (or measure or weight) at the end of
    an accounting period and then quantity on hand is
    multiplied by the cost per unit.
    The benefits of annual count are :
    a) Where the physical counting is done on the
    accounting date, all corrections made will ensure the
    accuracy of the inventory figure shown in all the
    accounts.
    b) It is less expensive than a continuous inventory
    system.
    II. Perpetual Inventory System : In contrast to the periodic system, the perpetual
    inventory item 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. It is relevant
    to state that the use of perpetual inventory method does not eliminate the need for a
    physical count and valuation.
    Methods of
    Inventory
    Valuation 1.
    2.
    Specific Identification of Costs
    First-in, First-out (FIFO)
    3. Last-in, First-out (LIFO)
    4. Weighted Average Method
    5. Highest-in, First-out (HIFO)
    ILLUSTRATION – 1 (FIFO : PERPETUAL INVENTORY SYSTEM)

    From the following transactions calculate the cost of ending inventory and cost of goods sold by applying
    FIFO under perpetual and periodic inventory systems respectively :

    Date Transactions Units Price Per Unit


    January 1 Opening Balance 1,000 20
    brought forward
    February 10 Purchases 500 25
    March 13 Purchases 400 22
    March 20 Sold 1,200 …
    April 6 Sold 500 …
    May 12 Purchases 400 25
    June 30 Sold 500 …
    THANK YOU

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