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Inventory Valuation

AS 2 outlines the accounting treatment for inventory valuation, requiring that inventories be recorded at the lower of cost or net realizable value. It defines inventory and details the costs included in valuation, as well as permissible methods like FIFO and Weighted Average Cost, while prohibiting LIFO. The document also includes practical examples for calculating ending inventory and cost of goods sold using the FIFO method.

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10 views2 pages

Inventory Valuation

AS 2 outlines the accounting treatment for inventory valuation, requiring that inventories be recorded at the lower of cost or net realizable value. It defines inventory and details the costs included in valuation, as well as permissible methods like FIFO and Weighted Average Cost, while prohibiting LIFO. The document also includes practical examples for calculating ending inventory and cost of goods sold using the FIFO method.

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rahulgupta2k03
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We take content rights seriously. If you suspect this is your content, claim it here.
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Unit-3 Inventory Valuation

AS 2 (Accounting Standard 2) focuses on the valuation of inventories. It prescribes the


accounting treatment for inventories to ensure they are reflected at their fair value in financial
statements.

Definition of Inventory:

• Inventories include items held for:


o Sale in the ordinary course of business.
o In the process of production for such sale.
o In the form of materials or supplies to be consumed in production or rendering
of services.

Valuation Principle:

• Cost or Net Realizable Value (NRV), whichever is lower.


• Cost includes:
o Purchase cost (including taxes and freight).
o Conversion costs (e.g., labor, overheads).
o Other costs required to bring the inventory to its present condition and
location.
• NRV is the estimated selling price less the costs of completion and selling expenses.

Methods of Inventory Valuation:

• FIFO (First-In, First-Out): Assumes that the earliest goods purchased are the first to
be sold.
• Weighted Average Cost: Averages out the cost of inventory for valuation purposes.

Note: LIFO (Last-In, First-Out) is not permitted under AS 2.

A.

Question 1: Ending Inventory Calculation

XYZ Ltd. has the following inventory records:

• Opening Inventory: 200 units at ₹15 each.


• Purchase on March 1: 150 units at ₹18 each.
• Purchase on March 5: 100 units at ₹20 each.
• Sale on March 10: 300 units.

Calculate the value of ending inventory after the sale on March 10 using the FIFO method.

Question 2: Multiple Sales Transactions


DEF Corp. had the following inventory transactions:

• January 1: Opening Inventory: 300 units at ₹10 each.


• January 10: Purchase: 200 units at ₹12 each.
• January 15: Sale: 250 units.
• January 20: Sale: 100 units.
• January 25: Purchase: 150 units at ₹14 each.
• January 30: Sale: 200 units.

Calculate ending inventory at January 31.

Question 4: Adjusting for Returns

GHI Ltd. has the following transactions for January:

• Opening Inventory: 100 units at ₹30 each.


• Purchase on January 5: 200 units at ₹35 each.
• Sale on January 15: 150 units.
• Sale on January 20: 50 units.
• Return of goods sold: 20 units from the January 15 sale.

Calculate the adjusted COGS and ending inventory at January 31 using FIFO.

Question 5: Cumulative Sales

JKL Ltd. has the following transactions for February:

• February 1: Opening Inventory: 400 units at ₹25 each.


• February 10: Purchase: 150 units at ₹28 each.
• February 15: Sale: 250 units.
• February 20: Sale: 150 units.
• February 25: Purchase: 200 units at ₹30 each.

Calculate the total COGS and ending inventory using the FIFO method.

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