Accounting Standard2

7/30/2019 Accounting Standard2

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Accounting Standards

2

Valuation Of Inventories


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Objective of Accounting

Standards The basic objective of accounting standards is to

remove variations in the treatment of severalaccounting aspects and to bring about

standardization in presentation

The ACCOUNTING STANDARDS BOARD(ASB) which functions under ICAI issuesaccounting standards


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OBJECTIVE

valuation of inventories

Formulate the method of computation of cost ofinventories/stock.

Determining the value of closing stock at which it is to beshown in balance sheet till it is not sold and recognized asrevenue.

Situation in which carrying cost of inventories is writtenbelow cost


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Applications

This Standard should be applied in accounting for inventories otherthan:(a)work in progress arising under construction contracts, including directly related

service contracts

(b)work in progress arising in the ordinary course of business of service providers;

(c)shares, debentures and other financial instruments held as sk in trade; and

(d)producers' inventories of livestock, agricultural and forest products, and mineral

oils, ores and gases to the extent that they are measured at net realisable value inaccordance with well established practices in those industries.


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DEFINITION

Inventories are assets: Held for the sale in the ordinary course of business

(Finished Goods).

In the process of production of such sale (Raw material andworking progress).

In the form of materials and supplies to be consumed in theproduction process or in the rendering of services (Stores,Spares, Raw material).

Inventories do not include machinery.


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Measure Of Inventories

MAJOR POINTS FOR VALUATION OFINVENTORIES Determination of cost of Inventories

Determination of net realizable value of inventories

Comparison between the cost and net realizable value


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Determination of Cost of

InventoriesCost of Inventories Includes:

Cost of Purchase Cost of Conversion

Other Costs (incurred in bringing the inventories to their present

location and condition)


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Cost Of Purchase

Purchase Price

Duty

Taxes

Freight Inward Other Expenditure directly attributable to the acquisition.

Duties and taxes recoverable by enterprises from taxing authorities

Trade discount CENVAT

VAT

Duty Drawback

Rebate


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Cost Of Conversion

It Consists of

the cost directly related to the units of production(DirectLabor, Direct Material, Direct Expenses)

Systematic allocation of fixed and variable productionoverheads that are incurred in converting material into finishedgoods.


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Other Costs

Cost incurred in bringing the inventories to theirpresent location and condition

Excise duty contributes directly to bringing the inventories toits present location and condition

Excise duties is direct costs, which should be included in the

valuation of inventories


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Determination of net

realizable value of Inventories.

Net realizable value means estimated selling price in ordinary course ofbusiness estimated costs of completion and estimated costs necessaryto make the sale

If the finished product is sold at cost or above cost, then the estimatedrealizable value of raw material and supplies is considered more than itscost

If the finished product is sold below cost, then the estimated realizablevalue of raw material or supplies is equal to replacement price of rawmaterial or supplies


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Comparison between the cost

and net realizable value

The comparison between the cost and net realizable value

should be made by grouping the items.


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Methods of computing

Inventories

First-in, First-out (FIFO)

Last-in, First-out (LIFO) Weighted-average cost (WAC)


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First-in, First-out (FIFO)

This method assumes that the first unit acquired are thefirst unit sold

The costs of ending inventories is that of the most recent

purchases A major criticism of FIFO: Improper matching of cost

with revenues since the cost of goods sold is computed onthe bases of old price that are possibly unrealistic


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FIFO METHOD


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Last-in, First-out(LIFO)

This method assumes that the last unit acquired are thefirst unit sold

The cost of the units in the ending inventory is that of theearliest purchases

The chief advantage of LIFO is that balance sheet valueof inventories may be outdated and unrealistic


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LIFO METHOD


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Weighted average Cost

(WAC) This method assumes that the goods available for

the sale are homogeneous

The average cost is computed by dividing the costof goods available for sale by the number of theunits available by sale

The major criticism of WAC is that it assigns nomore importance to current prices than to pastprices paid several months ago


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WAC METHOD


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Disclosure in financialstatements

Accounting policy adopted in measuringinventories

Cost formula used

Classification of inventories like Finished Goods,WIP, Raw Materials, Spare Parts.


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Presented By

GROUP NO: 2Wesley VargheseAkhil John

Vinayak ShenoyMukul PooniaAbhishek VyasSandeep Kumar .N.R

Sukesh PoojariSuprit Nayak


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THANK YOU

Accounting Standard2

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