inventory valuation methods ppt

inventory valuation ppt and acceptable inventory valuation methods include
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Dr.DinoHardy,United Arab Emirates,Teacher
Published Date:25-07-2017
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Section A Fundamentals of Accountancy ,Chapter 4 CA (Dr.) Akash Gupta FCA, M.COM, PHD Inventory can be defined as tangible assets: Held for sale in the ordinary course of business; In the process of production for such sale; In the form of materials or supplies to be consumed in the production process or in the rendering of services. In case of manufacturing Concerns • Raw Material • Work in Progress • Finished Goods • Stores and Supplies In case of Trading Concern • Finished Goods Determination of income • The valuation of inventory is necessary for determining the true income earned by a business entity during a particular period to determine gross profit, cost of goods sold is matched with revenue of the accounting period. Inventory valuation is useful to Determination of income ascertainment of Financial Position Liquidity analysis Statutory Compliance  Cost of goods sold is calculated as follows Opening stock XXXX Add Purchases XXXX Add Direct expenses XXXX Less Closing stock XXXX Cost of goods sold XXXX Impact of Inventory valuation on the income determination When closing inventory is overstated, net income for the accounting period will be overstated. When opening inventory is overstated, net income for the accounting period will be understated. While finalizing the current year’s profit, the company realized that there was an error in the valuation of closing stock of the previous year. In the previous year, closing stock was valued more by Rs.50,000. As a result (a) Previous year’s profit is overstated and current year’s profit is also overstated (b) Previous year’s profit is understated and current year’s profit is overstated (c) Previous year’s profit is understated and current year’s profit is also understated (d) Previous year’s profit is overstated and current year’s profit is understated Ans. (d) Ascertainment of Financial Position • Inventories are classified as current assets. The value of inventory on the date of balance sheet is needed to determine the financial position of the business. In case the inventory is not properly valued, the balance sheet will not disclose the truthful financial position of the business. Liquidity analysis Inventory is classified as a current asset, it is one of the components of net working capital which reveals the liquidity position of the business. Current ratio which studies the relationship between current assets and current liabilities is significantly affected by the value of inventory. Statutory Compliance Revised Schedule VI of the Companies Act, 1956 requires valuation of each class of goods i.e. raw material, work-in-progress and finished goods under broad head to be disclosed in the financial statements. As per the requirements of the Accounting Standards, the financial statements should disclose Statutory Compliance Contd…. The accounting policies adopted in measuring inventories, including the cost formula used, The total carrying amount of inventories and its classification appropriate to the enterprise. The common classification of inventories are raw materials; work-in-progress; finished goods; stores and spares and loose tools. Inventories should be generally valued at the lower of Cost Net Realizable Value ( NRV) • The amount of expenditure incurred on Cost acquisition of goods. • This is the estimated selling price in the ordinary course of Net business less the estimated Realizable costs of completion and the estimated costs necessary to Value : make the sale Inventory, not ordinarily interchangeable Inventory, ordinarily interchangeable Inventory, ordinarily interchangeable Historical cost Methods Non-historical cost Inventory, not ordinarily interchangeable Specific identification Method

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