INVENTORY VALUATION

METHODS OF TAKING INVENTORY

(1) PERIODIC INVENTORY

STOCK IS ASCERTAINED BY PHYSICALLY COUNTING THE STOCK AT THE END OF YEAR AND AN ON ACCOUNTING DATE.

IT IS AN EASY METHOD AT THE YEAR END.

(2) PERPETUAL INVENTORY

UNDER THIS METHOD STOCK REGISTERS ARE MAINTAINED WHICH WILL GIVE THE INVENTORY BALANCES AT ANY TIME DESIRED.

MORE SCIENTIFIC METHOD. IT WILL INVOLVE LOT OF PROCEDURES AND METHODS TO EVALUATE THE COSTING.

VALUE OF INVENTORIES INCLUDES WHAT ?

A. COST OF PURCHASE.

B. COST OF CONVERSION

C. OTHER COSTS INCURRED TO BRING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION.

EXAMPLE : DUTIES AND TAXES (WHICH ARE NOT RECOVERABLE) , FREIGHT INWARD . FUTHER EXAMPLE COULD BE OTHER EXPENDITURES DIRECTLY ATTRIBUTABLE TO THE
ACQUISITION . FOR EXAMPLE PURCHASE MIGHT HAVE BEEN EFFECTED BY DEPUTING A SPECIAL TEAM TO NEGOTIATE THE PRICE AND INSPECT THE QUALITY ETC.

TRADE DISCOUNT , REBATES, DUTY DRAWBACK AND OTHER SIMILAR ITEMS ARE DEDUCTED IN DETERMINING THE COSTS OF PURCHASE.

INVENTORIES ARE ALWAYS VALUED AT LOWER OF COST AND NET REALISABLE VALUE. THIS IS THE PRINCIPLE OF CONSERVATISM.

FOR EXAMPLE IF AN ITEM CAN BE SOLD SAY FOR RS. 1,500, AFTER SPENDING RS.200/- TO POLISH IT AND RS.100/- TO ADVERTISEMENT IN LOCAL NEWSPAPER, THE NET
REALISABLE VALUE WORKS OUT TO RS.1200 THAT IS RS.1500-200-100.

ACCOUNTIG STANDARDS STATES THAT THE COST OF INVENTORIES SHOULD GENERALLY BE VALUED USING THE FIFO METHOD (THAT IS FIRST IN FIRST OUT METHOD) OR
WEIGHTED AVERAGE COST MEHTOD.

FIFO METHOD.
ILLUSTRATION – FIFO

The following are the details of spares part of Sriram Mills :

1-1-2009 Opening stock …………………………………….NIL

1-1-2009 Purchases………………………100 units @ Rs.30/- per unit.

15-1-2009 Issued for consumption………..50 units.

1-2-2009 Purchases……………………….200 units @ Rs.40/- per unit.

15-2-2009 Issued for consumption…………100 units.

20-2-2009 Issued for consumption………….100 units.

Find out the value of the stock as on 31-3-2009, if the company follows FIFO METOD. (FIRST IN FIRST OUT METHOD)

RECEIPTS ISSUES BALANCE

Date Units Rate Amt Units Rate Amt Units Rate Amt
Rs. Rs. Rs.
1-1-09 Bal Nil Nil Nil

1-1-09 100 30 3000 100 30 3000

15-1-09 50 30 1500 50 30 1500

1-2-09 200 40 8000 50 30 1500

 200 40 8000

15-2-09 50 30 1500 150 40 6000

50 40 2000

20-2-09 100 40 4000 50 40 2000

ILLUSTRATION - WEIGHTED AVERAGE COST.

The following are the details of spares part of Sriram Mills :

1-1-2009 Opening stock …………………………………….NIL

1-1-2009 Purchases………………………100 units @ Rs.30/- per unit.

15-1-2009 Issued for consumption………..50 units.

1-2-2009 Purchases……………………….200 units @ Rs.40/- per unit.

15-2-2009 Issued for consumption…………100 units.

20-2-2009 Issued for consumption………….100 units.

Find out the value of the stock as on 31-3-2009, if the company follows WEIGHTED AVERAGE METHOD.
 RECEIPTS ISSUES BALANCE

Date Units Rate Amt Units Rate Amt Units Rate Amt
Rs. Rs. Rs.
1-1-09 Bal Nil Nil Nil

1-1-09 100 30 3000 100 30 3000

15-1-09 50 30 1500 50 30 1500

1-2-09 200 40 8000 250 38 9500

15-2-09 100 38 3800 150 38 5700

20-2-09 100 38 3800 50 38 1900

WEIGHT AVERAGE IS WORKED OUT ……….(1500+8000) = 9500 DIVIDED BY QTY OF 250 UNITS
……………………………..RS.38/-

ACCOUNTING STANDARDS ALLOW TO USE WEIGHTED AVERAGE ON EACH AND EVERY PURCHASE BASIS AND RE
COMPUTE WEIGHTED AVERAGE AND APPLY THE SAME TO NEXT CONSUMPTION

OR
WEIGHTED AVERAGE CAN BE COMPUTED ON A PERIODICAL BASIS AND CAN BE APPLIED TO ALL THE CONSUMPTION
OR ISSUES.
DETERMINATION OF GROSS PROFIT

(FROM SALES DEDUCT COST OF GOODS SOLD = GROSS ROFIT.

GROSS PROFIT IS EXPRESSED AS A % OF SALES ALWAYS.

GROSS PROFIT

GROSS PROFIT = ------------------------ X 100

SALES

WHEN WE SAY SALES, IT IS ALWAYS MEANS (NET SALES FIGURES)

SALES MINUS SALES RETURNS IS ALWAYS EQUAL TO NET SALES.

WHAT DO YOU MEAN BY COST OF SALES :
COST OF SALES IS ARRIVED AS UNDER :

OPENING STOCK XXXXXXXXX

ADD PURCHASES XXXXXXXXX

ADD : COST OF FREIGHT ETC. XXXXXXXXX

*LESS CLOSING STOCK XXXXXXXXX

COST OF SALES XXXXXXXXX

*COUNT THE PHYSICAL STOCK AND VALUE

THE SAME AT COST PRICE EITHER / FIFO / weighted

average method)

CONSIDER THE FOLLOWING DATA PERTAINING TO A COMPANY FOR THE MONTH OF MARCH, 2017.

PARTICULARS AMOUNT (RS)

OPENING STOCK 22000
CLOSING STOCK 25000
PURCHASES LESS RETURNS 1,10,000
GROSS PROFIT MARGIN ON SALES 20%
DETERMINE SALES FOR THE MONTH.
SOULUTION :
OB STOCK + PURCHASES – CL STOCK = COST OF SALES
22000 + 110000 – 25000 = 107,000

IF SALES ARE RS.100 GP MARGIN 20 COST OF SALES IS 80

? COST OF SALES 107000

BY CROSS MULIPLICATION, THE ASWER IS RS.1,33750

ANSWERS ARE :

(A) RS.141250 (B) 135600 (C) 133750 (4) 128400

PROBLEM NO. 2
THE BOOKS OF T LTD REVEALED THE FOLLOWING INFORMATION.

PARTICULARS RS.

OPENING INVENTORY 6,00,000

PURCHASES DURING THE YEAR 2008-2009 34,00,000

SALES DURING THE YEAR 2008-2009 48,00,000

ON 31ST MARCH, 2009, THE VALUE OF INVENTORY AS PER PHYSICAL VERIFICATION AND STOCK TAKE IS
RS.3,25,000. ENTITY GROSS PROFIT REMAINED CONSTANT AT 25%. THE MANAGEMENT SUSPECTS THAT SOME
INVENTORY MIGHT HAVE BEEN PILFERED BY A NEW EMPLOYEE. WHAT IS THE ESTIMATED COST OF MISSING
INVENTORY.
OPENING STOCK + PURCHASES – CLOSING STOCK = COST OF GOODS SOLD.

SALES MINUS COST OF GOODS SOLD = GROSS PROFIT

IF SALES ARE GIVEN AND GROSS PROFIT MARIN IS GIVEN, WE CAN EASILY FIND OUT THE COST OF GOODS
SOLD.

SALES ARE…………………………………………………………….………..48,00,000

LESS GP MARGIN…………………………………………..25%...........12,00,000

COST OF GOODS SOLD…………………………………………………….36,00,000

PUT THE EQUATION OF COST OF GOODS AND THE FIGURES, WE CAN FIND OUT THE STOLEN GOODS.

OPENING STOCK + PURCHASES – CLOSING STOCK = COST OF GOODS SOLD.

6,00,000 + 34,00,000 - ? = 36,00,000

THERFORE CLOSING STOCK SHOULD HAVE BEEN RS. 4,00,000

BUT WHEN WE PHYSICALLY VERIFIED ………………..RS. 3,25.000

MISSING INVENTORY……………………………………………RS. 75,000

ANSWER WHICH IS CORRECT.

(A) 75,000 (B) 25,000 (C) 1,00,000 (D) 1,50,000

‘
CLOSING STOCK IS ALWAYS IMPORTANT FOR GROSS PROFIT DETERMINATION
TRADING AND PROFIT AND LOSS

OPENING STOCK 10,000 BY SALES 2,00,000

PURCHASES 1,60,00 BY CLOSING STOCK 20,000

FREIGHT INWARD 10,000

GROSS PROFIT 40,000

TOTAL 2,20,000 TOTAL 2,20,000

THE SAME THING CAN BE REPRESNTED AS UNDER :

OPENING STOCK 10,000 BY SALES 2,00,000

PURCHASES 1,60,00

FREIGHT INWARD 10,000

LESS CLOSING STOCK (20,000)

GROSS PROFIT 40,000

TOTAL 2,00,000 TOTAL 2,00,000

JOURNAL ENTRY FOR CLOSING STOCK IS :

CLOSING STOCK ………..DR 20,000 ASSET

TO PROFIT & LOSS …….. 20,000 SHOWN IN P & L