Valuation of Inventory

Prof. Neha Modi

Valuation of Inventory

Inventory refers to the stock of goods in which a business deals on a regular basis

Valuation of Inventory

AS-2 Valuation of Inventories

Valuation of Inventory
Definition of INVENTORY as per AS 2 Assets held a) for sale in the ordinary course of business b) in the process of production for such sale c) in the form of materials and supplies to be consumed in the production process or in the rendering of services

Valuation of Inventory
Objectives of Inventory Valuation Determination of Income (Gross Profit)

Determination of Financial Position (Balance Sheet)

Determination of Liquidity (Ratio Analysis) Legal Obligation (Cos. Act, AS)

Valuation of Inventory
Methods of Valuation of Inventories 1. First In First Out Method (FIFO) 2. Last In First Out Method (LIFO) 3. Weighted Average Price Method

Valuation of Inventory
First In First Out Method (FIFO) ADVANTAGES Values the stock closer to the current market price - most recent purchases Based on cost - no unrealised profit Realistic - normal procedure of utilisation/selling those materials/goods which have been longest in stock.

Valuation of Inventory
First In First Out Method (FIFO) DISADVANTAGES 1. Involves complicated calculations and hence increases the possibility of clerical errors. 2. Comparison between different jobs using the same type of material becomes difficult.

Valuation of Inventory
FIFO method is suitable for 1. Perishable goods 2. No frequent purchases 3. Moderate fluctuations in the price of materials 4. Material easily identifiable as belonging to a particular lot

Valuation of Inventory
Last In First Out Method (LIFO) ADVANTAGES Takes into account the current market conditions Based on cost - unrealised profit

Valuation of Inventory
Last In First Out Method (LIFO) DISADVANTAGES 1. Involves complicated calculations

Valuation of Inventory
Last In First Out Method (LIFO) Suitable for materials which are of a nonperishable nature

Valuation of Inventory

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