Accounting Standard -2 : Valuation of Inventories

Sanjay Welkins: Page |1

AS- 2
INVENTORY VALUATION

Section - I - Initial Concepts

Main objective the standard is determination of carrying amount of

inventories in the Financial Statements.
Standard also provides guidelines with respect to determination of
cost of inventory and amount to be written off to bring the
inventories to their Net Realisable Value>

Significance of this Standard lies in the fact that valuation of

inventories affects - both Profit and loss and balance sheet.

Standard is not applicable to :

(a) Work in progress arising under construction contracts, including directly
related service contracts (see Accounting Standard (AS) 7, Construction
Contracts);
(b) Work in progress arising in the ordinary course of business of service
providers;
(c) Shares, debentures and other financial instruments held as stock-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 in accordance with well established practices in those
industries.

As per AS-2 Inventories are assets:

(a) held for sale in the ordinary course of business example Finished
goods; or
(b) In the process of production (that is for production of finished goods) for
example work in progress; or
(c) In the form of materials or supplies to be consumed in the production
process or in the rendering of services example consumables, loose tools
etc.
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Are DDA Flats inventory for DDA

Yes ! as DDA Flats are meant for sale.

As per AS-2 Initial recording of Inventories should be at cost:

The cost of inventory includes-

Purchase price xxx
+ taxes / duties/ cess xxx
+ Freight Inwards xxx
+ Carriage Inwards xxx
+ all such expenses incurred in xxx
bringing the inventories to their present
location
- Tax credit xxx
- Volume Discount xxx
-Duty drawbacks xxx
xxx

: Section – 2 - Final Recoding : Cost or Net Realisable Value

[NRV]

Finished Goods:
Lower of :
Cost xxx
or xxx
NRV ( Expected Selling Price Less Expected selling xxx
costs)

Work in Progress:
Lower of :
Cost xxx
or xxx
NRV ( Expected Selling Price Less Expected selling xxx
costs and expected conversion costs)

Raw Material
Valuation of Raw materials depends upon selling price and cost
price of Finished goods in which such Raw materials are
incorporated :
If selling price of the FG happens to be more than the Cost Price
of the finished goods the RM shall be valued at Raw Material Cost
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If selling price of the FG happens to be Less than the Cost Price

of the finished goods the RM shall be valued at Replacement cost
of Raw Material

- Problem - 2.1

Quality limited shows its inventory at cost in the financial

statements. In the current year the net realisable value of the
inventory has gone down below the cost. Comment.
Answer:
As per AS-2 inventories should be valued at lower of cost or NRV
– therefore enterprise should value the inventory, in the current year
at NRV.

Problem – 2.2
The company deals in three products - A,B and C which are
neither similar nor interchangeable. At the time of closing of its
account for the year 2019-20, the historical cost and NRV of the
items of closing stock are determined as follows-
Items Historical cost [lacs] NRV [lacs]
A 40 28
B 32 32
C 16 24
What will be value of closing stock?
[Ans-76 lacs]

Problem – 2.3
S-9 Limited purchased goods at the cost of Rs. 40 lakhs in
October, 2018. Till March 31st , 2019, 75 % of the stocks were
sold. The company wants to disclose closing stock at Rs. 10
lakhs. The expected sale value is Rs. 11 lakhs and a commission
at 10% on sale is payable to the agent. Advise, what is the
correct closing stock to be disclosed as at 31-3-2019

Problem - 2. 4

Ya - Ya Ltd. has shown its inventory at cost in the financial

statements. In the current year, the realizable value of a portion of
inventory has gone down below the cost of goods. Comments.
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Solution: the company is not following AS-2. The AS-2 says that
inventories should be shown at lower or cost or net realizable
value. If there is a decline in realizable value below cost, the
inventory be shown at a lower value and the decrease in value
should be charged to the Profit & Loss A/c of the year.

Problem – 2.5
Flow do you deal with the following?
On 31.3.2018, the closing stock of Wilcox Ltd. includes 10,000 units
costing @ ` 10 i.e., Rs. 1,00,000. But the current market price as
on that date was @ ` 9 i.e., ` 90,000.
Solution:
According to AS 2, Valuation of Inventories will be lower of cost
and Net Realisable Value. In the present case the cost is Rs.
(10×10,000) i.e. `1,00,000 and the Net Realisable Value is ` 90,000.
Therefore the inventories will be valued at ` 90,000 i.e. at Net
Realisable Value.

Problem – 2.6
The total stock of 7O7 Limited as on 31.3.2019 was Rs. 5,00,000
of which stock amounting to Rs. 31,000 were not ascertained as
per AS 2.
Compute the value of the said stocks as per AS 2 for inclusion in
financial statements as on that date.
Type of Cost of Production Selling and Estimated Selling
Product Materials Expenses Distribution Price
` incurred expense to be `
` incurred
`
P 10,000 2,000 1,000 15,000
S 5,000 --- 500 4,500
T 12,000 3,000 2,000 18,000
27,000 5,000 3,500 37,500

As per Para 21, AS 2, inventories are usually written-down to net

realisable value on item-by-item basis. Thus, value of stock will be
computed as:
Type Cost Price (including Net Realisable Value Value of
of Production Exp.) (excluding Selling & Stock to be
Prod Distribution Expenses taken (lower
uct from Selling Price) of Cost
Price & Net
` ` Realisable
Value)
`
P 12,000 i.e(10,000 +2,000) 14,000 (15,000 –1,000) 12,000
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S 5,000 4,000 ( 4,500 – 500) 4,000

T 15,000 ( 12,000 + 3,000) 16,000 (18,000 –2,000) 15,000

31,000

2.7
Raw Material was purchased at Rs. 100 per Kg. Price of Raw
Material is on the decline. The Finished Goods in which Raw
Material is to be incorporated are expected to be sold below cost.
10,000 kg of Raw Material is in stock at end of the year.
Replacement cost per kg is Rs. 80.
Solution:
Valuation of Raw materials depends upon selling price and cost
price of Finished goods in which such Raw materials are
incorporated :
If selling price of the FG happens to be more than the Cost Price
of the finished goods the RM shall be valued at Raw Material Cost
If selling price of the FG happens to be Less than the Cost Price
of the finished goods the RM shall be valued at Replacement cost
of Raw Material
Since Selling price is below cost only Raw Materials shall be
valued at Replacement Cost.
Therefore closing inventory: 10,000 kg x 80 per kg = Rs. 8,00,000

2.8
On 31.03.18 there is work in progress of Product A. It is
estimated that Product can be sold at Rs. 1,000. Estimated
cost of completion is Rs. 200. Brokerage is 10% on Selling
price. Compute NRV.
Solution:
NRV
Estimated Selling Price 1,000
Less: Estimated Selling Cost : 1,000 x 10% 100
Cost of conversion 200
Net Realisable Value. 700

2.9
Calculate the value of Raw Material and Closing Stock on
the basis of following Information:
Raw Material X:
Closing Balance 500 Units
Rs. Per Unit
Cost Price
Including excise duties 200
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Excise duty (credit available ) 10

Freight Inward 20
Unloading charges 10
Replacement cost 150

Finished Goods Y
Closing Balance 1,200 units
Rs. per Unit
Material Cost 220
Direct labour 60
Direct Overheads 40
Total Fixed Overheads for the year amounted to Rs. 2,00,000 on
Normal Capacity of 20,000 units.
Calculate the value of Closing stock when:
NRV of the finished good Y is Rs. 400
NRV of the finished good Y is Rs. 300
Solution:
1. Cost of finished goods Y:
Cost Per unit
Material 220
Direct Labour 60
Direct Overheads 40
Fixed Overheads : 2,00,000 / 20,000 10
330
2.
Part A:Valuation when NRV is 400
(a) Finished goods:Y:
Cost Per unit
Cost 330
NRV 400
Closing Inventory of Finished Goods Y 1200 units
x Rs. 330 per unit
Valuation of closing inventory of finished Rs. 3,96,000
goods Y

(b) Raw Material: X: (Raw Material being incorporated in FG Y)

Cost Per unit
Cost of FG Y 330
Selling Price of FG Y 400
SP is Greater than CP of FG Y
RM shall be valued at Raw Material Cost
Raw Material cost : 200 - 10 + 20 +10 = 220
Valuation of closing Inventory of Raw Rs. 500 units x Rs.
Material 220 per unit = Rs.
1,10,000
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Part B:Valuation when NRV is 300

(a) Finished goods :Y:
Cost Per unit
Cost 330
NRV 300
Closing Inventory of Finished Goods Y 1200 units
x Rs. 300 per unit
Valuation of closing inventory of finished Rs. 3,36,000
goods Y

(b) Raw Material: X: (Raw Material being incorporated in FG Y)

Cost Per unit
Cost of FG Y 330
Selling Price of FG Y 300
SP is Less than CP of FG Y
RM shall be valued at Replacement cost of Raw Material that
is @ 150
Valuation of closing Inventory of Raw Rs. 500 units x Rs.
Material 150 per unit = Rs.
75,000

2.10
K-985 provide following information relating to items forming part of
inventory as at 31.03.219:
 Entity produces Product X and uses Raw Material F.
 600 units of Raw material F purchased @ Rs. 120.
Replacement cost of Raw Material A as on 31.3.19 is Rs.
90 per unit.
 500 units of partly finished goods in the process of
producing X and cost incurred till date Rs. 260 per unit.
These units can be finished next year by incurring additional
cost of Rs. 60 per unit.
 1500 units of finished Product X and total cost incurred Rs.
320 per unit.
Expected Selling Price of Product X is 300 per unit.
Determine how each item of inventory will be valued as at
31.03.19.
Solution:
Also calculate the value of total inventory as on 31.3.2019.
If finished product is expected to be sold below cost of finished
goods then Raw material should be valued at Replacement cost.
thus Raw material inventory shall be valued :. 600 units x Rs. 90
= Rs. 54,000
Valuation of WIP:
500 units of partly finished goods shall be valued at lower of Cost
and NRV.
Cost = Rs. 260 + 60 (additional cost) = 320
NRV that is Selling Price = 300 - 60 = 240
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thus 500 units shall be valued at : 500 x 240 = Rs. 1,20,000

Finished Goods:
Finished goods shall be valued at lower of cost or NRV
Cost is = Rs. 320 per unit while NRV (as finished goods can be
sold at Rs. 300) is 300.
Thus , Finished Goods will be valued at Rs. 4,50,000 that is 1,500
units x Rs. 300 per unit.
Valuation of Inventory as at 31.3.19:
 Raw Materials Rs. 54,000
 partly finished goods Rs. 1,20,000
 valuation of Finished Goods Rs. 4,50,000
 Total Rs. 6,24,000

- Section – 3 – Absorption of Fixed Overheads

As per AS-2 while valuing inventories Fixed Overheads should

be absorbed on the basis of Normal Capacity Production.

Problem – 3.1
Hayman limited has a normal capacity of 6,000 tonnes and fixed
annual overheads are Rs.24,000. During the year, it manufactured
only 5,500 tonnes at variable cost comprising of material and labour
@ Rs.6 and 4 per tonne. At the end of the year, it had 1800
tonnes of inventory. Find out the value of inventory as per AS-2.
[Ans. Rs.1,800 x 14]

Solution:
Cost of production (per tonne):
Variable cost (Rs.6 + Rs.4) Rs.10
Fixed Cost (Rs.24,000 /6,000) Rs. 4
Rs.14
Inventory at the end (tonnes) 1,800
Value of inventory (1,800 * Rs.14) Rs.25,200
It may be noted that the fixed expenses have been allocated on
the basis of standard cost system.

Section – 4 - Abnormal wastages/losses

While valuing inventories Abnormal wastages/losses and

selling, distribution and administrative overheads not connected
with bringing inventories to their present location and
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condition, interest expenses, storage cost if not necessary in

production process etc., should be ignored .

Problem – 4.1
Sony Pharmacy ordered 12000 kg of certain material at Rs. 80 per
unit. The purchase price includes excise duty Rs. 4 per kg in
respect of which full CENVAT credit is admissible. Freight incurred
amounted to Rs. 77,400. Normal transit loss is 3%. The company
actually received 11,600 kg and consumed 10,100 kg of material.
Compute cost of inventory under required Standard and amount of
abnormal loss.
Solution:.
Purchase Price 12,000 kg x 80 9,60,000
Less: CENVAT credit 12,000 kg x 4 48,000
Add: Freight 77,400
A. Total Material Cost 9,89,400
B. Total units ordered 12,000 kg
C. Normal Loss 3% 360
D Number of units after Normal loss 11,640
E. Normal cost per unit : A / D 85.00
Valuation :
Material consumed 10,100 x 85.00 8,58,500
Cost of Inventory that is 1,500 x 85.00 1,27,500
Remaining materials
Abnormal loss 40 x 85.00 3,400
Total Material cost 9,89,400

Problem – 4 .2
Z-888 ordered 13000 kg of certain chemicals at Rs. 90 per unit.
The purchase price includes excise duty Rs. 5 per kg in respect of
which full CENVAT credit is admissible. Further State VAT is
leviable at Rs. 2.5 per kg on Purchase price.
Freight incurred amounted to Rs. 30,000. Normal transit loss is 4%.
The company actually received 12,400 kg and consumed 10,000 kg
of material.
Company has received trade discount in form of cash amounting to
Rs. 1 per kg.
The chemicals were delivered in containers.
the containers were not re-useable, hence sold for Rs. 500.
the administrative expenses incurred to bring chemicals were Rs.
10,000.
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Compute cost of inventory under required Standard and amount of

abnormal loss.
Purchase Price 13,000 kg x 89 (90-1) 11,57,000
Less: CENVAT credit 13,000kg x 5 65,000
Add: Freight 30,000
Add: Allocated Adm. Expenses 10,000
A. Total Material Cost 11,32,000
B. Total units ordered 13,000 kg
C. Normal Loss 4% 520
D Number of units after Normal loss 12,480
E. Normal cost per unit : A / D 90.705
Valuation :
Material consumed 10,000 x 90.705 9,07,050
Cost of Inventory that is 2,400 x 90.705 2,17,692
Remaining materials
Abnormal loss 80 x 90.705 7,258
Total Material cost 11,32,000
Company has received a trade discount of Re. 1
 Abnormal losses are not considered for valuing inventory
rather debited to P&L
 Containers are used for delivery of the chemicals and are
not re-useable and as such treated as selling and
distribution expenses.
 Sale value of containers shall be credited to SP&L
 State VAT has not been included in the cost of materials
as VAT is credited in due course of time.

Problem – 4 . 3

Ninety Limited shows its finished goods inventory in the financial

statements at cost or net realizable value, whichever is less. The
cost is calculated by taking in account the variable cost (Material
and labour), packing material, position of fixed manufacturing
overheads (based on Standard/Normal Capacity) and share of
Administrative overheads. Comment.

Solution:
The company is not following a correct method of calculation of
cost. As per AS-2, the following are not to be included in valuation
of inventories:
 Abnormal wastages,
 Storage cost,
 Administrative overheads, and
 Selling & distribution costs.
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Problem – 4 . 4
From the following information ascertain the value of stock as on
31.03.2019
Opening stock as on 01.04.2018 28,500
Purchases 1,52,500
Manufacturing expenses 30,000
Selling expenses 12,100
Administrative expenses 6,000
Financial Expenses 4,300
Sales 2,49,000

At the time of valuing stock as on 31.03.2018 a sum of Rs. 3,500

was written off a particular item, which was originally purchased for
Rs. 10,000 and sold during the year at Rs. 9,000. barring this
transaction ,gross Profit earned during the year was 20% on sales
Valuation of stock:
Stock as on 1.1.18 28,500
Less: BV of abnormal 10,000 - 3,500 6,500 22,000
Item
Add: Purchases 1,52,500
Add: manufacturing 30,000
expenses
2,04,500
Less : cost of sales: Sales 2,49,000 less sale of 1,92,000
abnormal item 9,000 = Normal
sales 2,40,000 less GP @
20%
12,500

Problem – 4 . 4
Capital Cables limited has a normal wastage of 4% in the
production process. During the year 2019-20 the company used
12,000 Metric tonnes (MT) of raw material costing Rs. 150 per MT.
At the end of the year 630 MT of wastage was in stock.
the accountant wants to know how this wastage is to be treated in
the books.
Explain in the context of AS 2 the treatment of normal loss and
abnormal loss and also find out the amount of abnormal loss if
any.
According to AS - 2, abnormal amounts of wasted materials, labour
and other production costs are excluded from cost of inventories
and such costs are recognised as expenses in the period in which
they are incurred.
the amount of normal loss will be included in computing the cost of
inventories (finished goods) at the year end.
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Solution:

total Material used 12,000 MT

Normal Loss 4% that is 480 MT
abnormal loss = 630 - 480 = 150 MT
Cost of Material 12,000 MT 18,00,000 (12,000 x 150)
Less Normal loss 480 MT -
Net quantity 11,520 18,00,000
Cost per MT : 18,00,000/11,520 156.25 per MT
Value of abnormal loss : 150 x156.25 23,437.50

Section – 5 – Joint Products and By Products

Joint products are two or more outputs having significant values

that get generated from a single production process and that use
common inputs.

In cost accounting, all of the outputs of a single process are

not joint products, only those that have significant economic value
are considered joint products.

Any outputs having insignificant economic value and which are

not primarily desired to be manufactured are termed as by-products.
This differentiation is significant because costs accountants typically
allocate all the costs incurred on a joint production process to joint
products. No costs are typically allocated to by-products.
 Few examples of joint products are:
 Processing of crude oil to obtain gasoline, diesel, asphalt, jet
fuel and lubricants
 Production of butter, cheese and cream from milk
 Different grades of wood obtained from a same kind of tree

 The point at which a joint process yields separately

identifiable joint products is called split-off point.
 Cost are allocated to joint products at split-off point.

Some of the joint products may need further work after

split-off point in a separate process to bring them into usable or
saleable form.
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In such cases it is necessary to perform such additional

work to avoid loss and the total cost of the resultant product
includes additional expenses incurred after Split-off.

Joint products that are useable/saleable at split-off point may

also be further processed but the management of a company
will assess whether or not such additional work will result in net
incremental benefit. If the increase in value of the joint product
from further processing exceeds the additional expenses needed
to further process, it is beneficial to further process the joint
product.

Lansdowne woods Mart Limited is engaged in basic wood processing

and supplies following products:

 Lumber
 Firewood
 Sawdust

All of the above products are obtained from a joint process.

Here, lumber and firewood are joint products whereas sawdust is a

by-product due to its insignificant value. All of the three products
may be further processed e.g. sawdust may be compressed to
create wood pallets which are used as a bio-fuel.

Use the following data relating to two Products A and B obtained from a
joint process and allocate joint costs using each of the above methods.
Chemical A B
Quantity (kg) 100 150
Sale Value Rs.30,000 Rs.70,000
Further Processing Cost Rs.5,000 Rs.10,000
Total manufacturing cost of joint process was Rs.50,000.
Solution

Cost to be allocated to chemical A:

Physical Measurement 50,000 × 80 ÷ (100 + 150) 16,000

Method
Relative Sales Value 50,000 × 30,000 ÷ (30,000+70,000) 15,000
Method
NRV Method 50,000 × 25,000 ÷ (25,000+60,000) 20,833
Where, 25,000 = 30,000 − 5,000 and
60,000 = 70,000 − 10,000
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Since cost of Product A has been estimated we can find out the
cost Product B just by subtracting the above costs from the total
under each method respectively as shown below:
Cost to be allocated to Product B:
Physical Measurement Method 50,000 − 16,000 34,000
Relative Sales Value Method 50,000 − 15,000 35,000
NRV Method 50,000 − 20,833 29,167

Section – 6 - Specific Identification costs

The cost of inventory that is segregated for specific projects should

be assigned by specific identification of their individual costs.

Problem – 6.1

Fifty Ltd. manufactures furniture items as per specific order of the

customer. Paw material is purchased as per the order specification.
Which method of valuation of stock of raw materials or of finished
goods be adopted by the company and why?

Solution -
Often goods have to be manufactured according to customer's
wishes and desires and accordingly raw materials have to be
procured as per the specifications laid down the concerned party.
Quite obviously inventories under such circumstances are valued as
per specific cost identification.

Section – 7 - FIFO METHOD

The cost of inventories, other than those dealt with in paragraph

14, should be assigned by using the first-in, first-out (FIFO), or
weighted average cost formula. The formula used should reflect the
fairest possible approximation to the cost incurred in bringing the
items of inventory to their present location and condition.

Problem- 7.1
H-786 is a leading distributor of petrol. A detailed inventory of petrol
in hand is taken when the books are closed at the end of each
month. At the end of the month following information is available:
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Sales Rs. 47,25,000

General overheads cost Rs. 1,25,000
Inventory at the beginning 1,00,000 litres @ Rs. 15 per litres
Purchases:
June. 1st 2,00,000 litres @ 14.25
June 30 1,00,000 litres @ Rs. 15.15
Closing inventory 1,30,000 litres
compute the following by FIFO as per AS -2:
value of inventory on June 30th .
amount of cost of goods sold for June.
Profit or Loss for the month of June.
Inventory at the 1,00,000 litres @ Rs. Rs. 15,00,000
beginning 15 per litres
Purchases:
June. 1st 2,00,000 litres @ 14.25 Rs. 28,50,000
June 30 1,00,000 litres @ Rs. Rs. 15,15,000
15.15
58,65,000
Closing inventory 1,30,000 litres WN (19,42,500)
1,00,000 x 15.15 =
15,15,000
30,000 x 14.25 =
4,27,500
Cost of goods sold 39,22,500

Profit or Loss:
Sales Rs. 47,25,000
Cost of goods sold Rs. (39,22,500)
General overheads Rs. (1,25,000)
Profit Rs. 6,77,500

Out Of Total 4,00,000 Litres Closing Is 1,30,000 Litres Which

Means, 2,70,000 Litres Have Been Issued/Used/Sold.

Problem- 7.2

Kaun-Sa-Method Ltd. shows its inventory at the lower of cost or net

realizable value. For this purpose, the cost as computed by applying
the LIFO method and the net realizable value is taken as equal to
the current market price of purchasing these inventories

Solution -
The company is following the policy of valuation inventory as per
AS-2 i.e., lower of cost or net realizable value. But, the calculation
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of cost and net realizable value is not being made as per AS-2
which requires that cost of inventory be found as per FIFO method
and net realizable value of inventory means the estimated selling
price less the expenses necessary to make such sale.

Problem – 7.2

Wyes Ltd. values its finished goods at prime cost (FIFO) or net
realizable value, whichever is less. Comment.

Solution -
FIFO based prime cost is not advised by the AS-2 which says that
cost of finished goods should include cost of raw material, packing
material and a portion of fixed and valuable overheads.

Section –8- Interest and Borrowing Costs

As per Para 12, AS 2, Valuation of Inventories, interest and

other borrowing costs are usually considered as not relating
to bringing the inventories to their present location and
condition and are, therefore, usually not included in the cost
of inventories

Problem – 8.1
How will you deal with the following situation?
“A company deals in purchase and sale of timber and has included
notional interest charges calculated (on the paid-up share capital and
free reserves) in the value of stock of timber as at the Balance
Sheet date as part of cost of holding the timber”.
Solution:
According to Valuation of Inventories, interest and other borrowing
costs are usually considered as not relating to bringing the
inventories to their present location and are, therefore, usually not
included in the cost of inventories. Hence, the valuation of closing
stock of timber cannot be considered as it is not in conformity with
AS 2.

Problem – 8.2
How would you deal with the following in the annual accounts of a
company for the year ended 31.3.2013?
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“The company has to pay delayed cotton clearing charges over and
above the negotiated price for asking delayed delivery of cotton from
the supplier’s godown. Up to 2011-12, the company has regularly
included such charges in the valuation of closing stock. This being
in the nature of interest the company has decided to exclude it
from closing stock valuation for the year 2012-13. This would result
into decrease in profit by Rs. 7.60 lakhs.”

Solution:
As per Para 12, AS 2, Valuation of Inventories, interest and other
borrowing costs are usually considered as not relating to bringing
the inventories to their present location and condition and are,
therefore, usually not included in the cost of inventories. Thus, it
becomes quite clear that delayed cotton clearing charges which were
treated in the nature of interest must not be included while valuing
closing stock as per the provision of AS 2 and it is not in
compliance with AS 2 which was done up to 2010-11.
But from year 2011-12, the company decided to change the earlier
view i.e. they decided to exclude the same from the valuation of
closing stock which is, no doubt, in compliance with AS 2.
As a result of change in accounting policy regarding valuation of
stock the profit was reduced by is. 7.60 lakhs which must be
disclosed in the financial statement or per AS 1 as Notes to
Account.

- Section – 9 - Non- Applicability of AS-2

Problem – 9 .1 –

How the following can be valued as per AS-2 for presentation in

the financial statements:

(a) Work in progress arising under construction contracts, including

directly related service contracts (see Accounting Standard (AS) 7,
Construction Contracts);

(b) Work in progress arising in the ordinary course of business of

service providers;

(c) Shares, debentures and other financial instruments held as stock-

in-trade; and

(d) Producers’ inventories of livestock, agricultural and forest

products, and mineral oils, ores and gases to the extent that they are
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measured at net realisable value in accordance with well established

practices in those industries.
Solution:
AS-2 is not applicable for valuation of inventory in any of these
cases.

- Section – 10 - Disclosure Requirements

Disclosure
The financial statements should disclose:

(a) The accounting policies adopted in measuring inventories,

including the cost formula used; and

(b) The total carrying amount of inventories and its classification

appropriate to the enterprise.
Information about the carrying amounts held in different classifications
of inventories and the extent of the changes in these assets is
useful to financial statement users. Common classifications of
inventories are:
(a) Raw materials and components
(b) Work-in-progress
(c) Finished goods
(d) Stock-in-trade (in respect of goods acquired for trading)
(e) Stores and spares
(f) Loose tools
(g) Others (specify nature),”.