ACCOUNTS 4.

Inventories

4. INVENTORIES
CONCEPT 1 : MEANING OF INVENTORY
1] For Manufacturer :

Finished Work in progress Raw Material

goods (WIP)
For Sale In the course of conversion Used in the process of
into finished goods production/Consumption.
Raw Material
(+) Wages
(+) Direct expenses Manufacturing account
(+) Factory overheads.
(Indirect expenses)

1) Trading a/c – Cr. side

2) Asset side.

1) 2] For Trader :
[1] Only finished goods.
[2] So, he prepares only Trading account
CONCEPT 2 : DIFFERENCE AND SIMILARITIES
[1] Inventory Under Final A/c
[2] Inventory under Inventory Valuation

Differences

Final a/c Inventory valuation

How & where to record inventory At what amt. to calculate ?

?
 SIMILARITIES (in case of trader) :
[1] COGS = Opening Stock + Purchase + Direct expenses – Closing stock (FG)
For Manufacturer :
Calculation of COGS
Sr. No. Particulars Rs
i) Opening stock of FG xx
ii) (+) Raw materials purchases xx
iii) (+) Wages xx
iv) (+) Factory overheads xx
v) (-) Closing stock of FG xx
vi) COGS xx

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 Logic :
Trading A/c
Particulars Rs Particulars Rs
To Opening stock By Sales
To Purchases By Closing stock
To Direct exp.
To GP
[1] COGS = Sales – GP
[2] COGS = Opening Stock + Purchases – Closing stock
Cost of

Goods sold Production Consumption

(Finished goods) (FG) (WIP) (R.M)

Trader : Only Op. stock (RM) +

Op. St. + Purchase – Cl. St. Manufacturer Purchase – Cl. St.
(FG) (FG)
Manufacturer : Op. stock (RM/WIP) + Only
Op. St. + Production – Cl. St. Purchase + Direct expenses + Manufacturer
(FG) (FG) Wages + Factory OH – Cl. St.
(RM/WIP) (at Intermediate)

 Logical Format :
[1] Consumption A/c (RM)
Particulars Rs Particulars Rs
To Op. St. (RM)
To Purchase (RM) By Consumption (Used)
By Cl. St. (RM) (Unused)
[2] Production (WIP) (FG)
Particulars Rs Particulars Rs
To Op. St. (WIP)
To Consumption (RM) By Production (FG)
To Wages
To FOH. By Cl. St. (WIP)
[3] Production (WIP) (FG)
Particulars Rs Particulars Rs
To Op. St. (FG)
To Production By COGS
By Cl. ST. (FG)
 Production :-
[1] RM FG
Cost :
Conversion Cost

Wages + Factory OH.

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 ACCOUNTS 4. Inventories
[2] Find out selling price when COGS is given.
[3] Find out COGS when S.P. is given.
☺ Eg : - (1) 20% on cost 100 + 20 = 120
(2) 30% on sales 70 + 30 = 100
COGS + Profit = sales

CONCEPT 3 : INVENTORY SYSTEM

Periodic COGS Normal/Abnormal Perpetual

(Bal. Fig.) (Bal. Fig.)
1) No inventory details maintained. 1) Inventories are recorded immediately (daily
2) Inventory is taken at the end of the year. basis)
3) Simple & cheaper. 2) Books are maintained regularly and stock is
4) Missing inventory is considered as a part taken periodically
of sale. 3) Costlier.
5) Maintained by low price retailers 4) Missing inventory is normal / abnormal loss.
5) Maintained by high price retailers

CONCEPT 4 : PRINCIPLE OF VALUATION OF INVENTORIES

Main Product By Product

Intentionally produced Unintentionally produced

Cost OR NRV whichever is lower NRV

Prudence
(Cr. Profit )
Expenses Incurred

Material wages Admin OH

Direct Expenses S&D OH
Factory OH
Not Considered
Considered

[1] Interest cost / Financial expenses (Exception 4) :

[a] Interest is never considered for calculation of closing stock
[2] Storage Costs : Warehouse expenses :

Raw material WIP FG

Considered as a part Don’t consider

of closing stock for a/c of Cl. St.
 If Storage cost is silent always consider for Finished goods.

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[3] Packing :

Primary (essential) Secondary (not essential)

Compulsory To attract & to advertise

Recorded in Trading account Recorded in P&L account

Considered for Closing Stock value Don’t consider for Closing Stock value

[4] Interest (Exception)

Loan taken

For business purpose To make inventory saleable in market

Int. is not considered for Closing Inventory Valuation (eg : wine) add in closing inventory valuation.

 Note :
[a] Both expenses Debited to P&L.
[b] Above chart is only for valuation

CONCEPT 5 : METHODS OF INVENTORY VALUATION

Historical (4 methods) Non - Historical (2 methods)

Historical Methods

Not (tags) (Mixed) Interchangeable

Interchangeable
[1] Specific Identification Method [1] FIFO
[2] LIFO
[3] Weighted average
[4] Simple Average
Non – Historical Methods

Standard Price Methods Adjusted Price Methods

[1] Specific identification method :-

 Practicable only for those items which are purchased for specific goods.
 For similar and interchangeable goods, this method is inconvenient.
 Physical tracing is required.
☺ Eg. Price tag

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[2] FIFO (First in First out) :
☺ Example :
Particulars Qty Rate(Rs)
Op Balance 100 Units 10
Purchases 200 Units 11
Issue 150 Units
Calculate issue amount & closing stock amount
Issue amount = (100 * 10) + (50 * 11)
(150 units ) = Rs1,550
Closing Stock = 150* 11
(150 units) = Rs1,650
 Features :
[i] Closing stock is recorded at latest purchase.
[ii] In inflation (rising prices), closing stock is recorded at highest price, so profit is higher.
[iii] In deflation, closing stock is recorded at lower price, so profit is lower.
 How to solve FIFO Problems in exam
Question1 :
Date Qty Price/Unit Issue Qty
4/12 900 5 5/12 600
10/12 400 5.5 12/12 400
11/12 300 5.5 29/12 600
19/12 200 6
28/12 800 4.75
[1] FIFO :
Receipts Issue Balance
Date Qty Price Date Qty Price Date Qty Price
4/12 900 5 4/12 900 5
5/12 600 5 5/12 300 5
10/12 400 5.5 10/12 300 5
400 5.5
11/12 300 5.5 11/12 300 5
400 5.5
300 5.5
12/12 300 5 12/12 300 5.5
100 5.5 300 5.5
19/12 200 6 19/12 300 5.5
300 5.5
200 6
28/12 800 4.75 28/12 300 5.5
300 5.5
200 6
800 4.75
29/12 300 5.5 29/12 200 6
300 5.5 800 4.75

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Cross Tally
Date Qty Price Issue Bal
4/12 900 5 -600/-300 0
10/12 400 5.5 -100/-300 0
11/12 300 5.5 -300 0
19/12 200 6 0 200
28/12 800 4.75 0 800
Issue Price = 900* 5 + 400 * 5.5 + 300 * 5.5
=Rs.8,350
Closing Stock = 200 * 6 + 800 * 4.75
= Rs.5,000
[2] LIFO :
Receipts Issue Balance
Date Qty Price Date Qty Price Date Qty Price
4/12 900 5 4/12 900 5
5/12 600 5 5/12 300 5
10/12 400 5.5 10/12 300 5
400 5.5
11/12 300 5.5 11/12 300 5
400 5.5
300 5.5
12/12 300 5.5 12/12 300 5.5
100 5.5 300 5
19/12 200 6 19/12 300 5.5
300 5
200 6
28/12 800 4.75 28/12 300 5.5
300 5
200 6
800 4.75
29/12 600 4.75 29/12 300 5.5
300 5
200 6
200 4.75
Cross Tally
Date Qty Price Issue Bal
4/12 900 5 -600 300
10/12 400 5.5 -100 300
11/12 300 5.5 -300 0
19/12 200 6 0 200
28/12 800 4.75 -600 200

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 ACCOUNTS 4. Inventories
 Features :
[i] Earlier lots will be in stock.
[ii] In case of inflation, inventory will be valued at oldest price (lowest price) Closing Stock→Profit 
[iii] In case of deflation, Closing Stock→ Profit 
[iv] LIFO is not permissible as per AS -2.
[v] Used in U.S.
[3] Weighted average method :

Sr. No Particulars Date Qty. Rate Amount

1. Purchases 04/12 900 5 4,500
2. Issue 05/12 -600
3. Balance 300 5 1,500
4. Purchases 10/12 400 5.5 2,200
5. Balance (A) 700 (C) 5.2857 (B) 3,700
6. Purchases 11/12 300 5.5 1650
7. Balance (A) 1000 (C) 5.35 (B) 5,350
8. Issue 12/12 -400
9. Balance 600 5.35 3210
10. Purchases 19/12 200 6 1200
11. Balance (A) 800 (C) 5.5125 (B) 4410
12. Purchases 28/12 800 4.75 3800
13. Balance (A) 1600 (C) 5.13125 (B) 8210
14. Issue 29/12 -600
Balance 1000 5.13125 5131.25
Non – Historical Method :
[1] Adjusted Selling price method / retail inventory method :-
 Cost = Sales – GP
 Large number of Small value inventory
 Basic example :
Normal method Closing Stock
Trading A/c

Particulars Rs Particulars Rs
To goods available for Sale 60 By Sales (7Q * 12) 84
(Op. St. + Purchase) (10 Q *Rs6)
To GP * 42 By Cl. St. (3Q * 6) 18
Cross Tally → 7 pens * (12-6) = 42
 Step 1 : Goods available for sale =10 pens *Rs6 = Rs60
 Step 2 : Calculation of SP of (Sales + Cl. St.) =10 pens *`12 = Rs120.

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 ACCOUNTS 4. Inventories
 Step 3 : GP (if all units sold) =120 – 60 = Rs60
 Step 4 : Calculation of Cl. St. at cost :
COGS Profit Sales
60 60 120
18 18 36 (3 pens *Rs.12)

CONCEPT 6 : CALCULATION OF STOCK ON 31/03

If physical verification is

Before balance sheet After balance sheet

date i.e. 23rd march date i.e. 7th April.

Trading A/c (23rd march – 31st March)

Date Particulars Rs Date Particulars Rs
23/03 To Opening Stock xx 23/03 to 3/3 By Sales xx
23/03 to To Purchase xx 31/3 By Closing Stock ?
31/03
/ Trading a/c (31/03 – 07/04)
Date Particulars Rs Date Particulars Rs
31/03 To Opening Stock xx By Sales xx
To Purchase xx 7/04 By Closing Stock xx
To GP xx

CONCEPT 7 : NRV

Raw Material WIP FG

Replacement price Intermediate NRV = SP – Estimated

Intermediate Selling Expenses



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