4 Inventories

Valuation CostOR NRY

Meaning w e lower
10
Inventory can be defined as assets held Trading
f
for sale in the ordinary course of business, or finished goods
vans
motion

P
in the process of production for such sale, or
we
for consumption in the production of goods or services for sale,
including maintenance supplies and consumables other than RI
machinery spares, servicing equipment and standby equipment.
w
va E to
attempg
PPI.NET
Inventories

Manufacturing Trading
Concern Concern

Raw Finished Finished

WIP
Materials Goods Goods

9100masala
atopt
maida Oil kha mos
Panicconsume
Inventory Valuation
Prewoldndo
A primary issue in accounting for inventories is the determination of the value at which

inventories are carried in the financial statements until the related revenues are

recognized. Main objective of arriving at value at which inventories are carried in financial

statement until finally sold in market and revenues are recognized. The significance of

inventory valuation arises due to various reasons as explained in the following points:

124
Inventory valuation cost OR NRV
lower

NRV Net Realisable Value

Im twin uncooked
for samosa
Aloomasala Precookedsamosa
NRV Selling Price 50
maida
If Costof
selling 11
NRV
41
Replacementlost

100 1 week before WIP FI NRV

aai kharianto R 1
1 120 40 completion
1
cost

SP of FG
NRYof FG
costof
sellingof FG
costof completion ofWIP
NRVof will

Cost
Inventory

hm for
precooked samosa

Purchase Price TD I
DirectlyRelated
Expenses to bring affsaida
RM consumed cost
it to its present loc conversioncost
 Only nonrefundable
taxes are included in transienceinto E
cost www.II
ine e

AI
IP 100 7S Gogelservicesender

GST 18
8511 GST 90 GST liability

111
netpay 72

AI
IP 100 so
ustom
12 GST 90 GST liability
Duty
111
netpay 90

Trading all

Closing
Stock FG lost 100 100
1 20 NRV 80 120

Ant loss 20
 Raw material purchase construction business

Atos 114
100kg 1000
Sd 114
100kg 1000
16 100 kg 1200 16 100 kg 1200
119 100 1150 119 100 1150
kg kg
1112 100 kg 1250 1112 100 kg 1250
1 2 100kg 1300 1 2 100kg 1300
1 3 100kg 1250 1 3 100kg 1250

Total purchase 600kg Total purchase 600kg

Closingstock 150kg Closingstock 150kg

Trading

1150191 053

t.fi.is
fiiiiittiimon HisHoriealFost
Method Non HistoricalcostMetho
1
Goods Goods not Adjusted selling standard
Ordinarily
Price Method cost
Interchangeable Interchangeable
Method
to
Average FIFO LIFO specific Identification
lost As2 prohibits Method
the use of LIFO in generalcases
 INVENTORIES 4.11

SOLUTION
Inventories are to be valued at the lower of cost and Net Realisable Value (NRV). Inventories
are usually written down to NRV on an item-by-item basis. The Value of Closing Stocks is
determined as under:

Items Historical Cost Net Realisable Value Valuation = Least of

(in ` Lakhs) (in ` Lakhs) Cost or NRV

Q
38

29
42

29
0
38

29

R 17 14 14

Total 81

(ii) FIFO (First in first out) Method

This method is based on the assumption that cost should be charged to revenue in the order
in which they are incurred, that is, it is assumed that the issue of goods is usually from the
earliest lot on hand. The inventory of goods on hand therefore, consists of the latest
consignments. Thus, the closing inventory is valued at the price paid for such consignments.

The FIFO formula assumes that the items of inventories which were purchased or produced
first are consumed or sold first and consequently items remaining in the inventory at the end
of the period are those most recently purchased or produced. This assumption is in line with
the good business practice to disposing goods in the order of their acquisition especially in
the case of perishable goods and items with frequent technological changes. It must be kept
in mind that this assumption of cost flow or goods flow need not be true as a physical fact i.e.
not necessary goods are physically also sold or issued in the chronological order of their
purchase or production. It relates only to the method of accounting and not to the actual
physical movement of goods.
Now, let us take an example to understand the application of FIFO method.
ILLUSTRATION 2
A manufacturer has the following record of purchases of a condenser, which he uses while
manufacturing radio sets:

Date Quantity (units) Price per unit 1 simple Average

Dec. 4 900 50
50 55 55 60 47
Dec. 10 400 55
5
53 4 unit
1000

© The Institute of Chartered Accountants of India 0113

Value of closing stock FIFO method
Ament simple Average
200 60 800 47 Weighted Average

41101
1.12 ACCOUNTING
4.12

Dec. 11 t 300 1000 55

Dec. 19 200 60
Dec. 28 800
2,600
II 47

O
1,600 units were issued during the month of December till 18th December. Calculate the value
of closing inventory.

II
SOLUTION
The closing inventory is 1,000 units and would consist of:
800 units received on 28th December; and 200 60
200 units received on 19th December as per FIFO 800 47
`

The value of 800 units @ ` 47 37,600

The value of 200 units @ ` 60 12,000

Total
0
49,600

(iii) LIFO (Last in first out) Method

As the name suggests, the LIFO formula assigns to cost of goods sold, the cost of goods that
have been purchased last though the actual issues may be made out of the earliest lot on
hand to prevent unnecessary deterioration in value. The closing inventory then is assumed to
consist of earlier consignments and its value is then calculated according to such
consignments. Under this basis, goods issued are valued at the price paid for the latest lot of
goods on hand which means inventory of goods in hand is valued at price paid for the earlier
lot of goods. In the absence of details of issue, the price paid for the earliest consignments is
used for valuing closing inventory. LIFO method is based on the principle of matching current
cost with current revenue as cost of recently purchased or produced goods are charged to
cost against each sale. The cost of goods sold under this method represents the cost of recent
purchases resulting that there is better matching of current costs with current sales.

© The Institute of Chartered Accountants of India

 INVENTORIES 4.13

ILLUSTRATION 3
Unctad usingstock vae
In the previous example assume that following issues were made during the month of December:
Record of issues

Date Issue Quantity (units)

Dec. 5 500

1tfoo Ocs
Dec. 20 55110100600
cs 400 5014 400
Dec. 29 400 50 4 400 55110 500
E.gg
Total 300 47 28 1,600
T 500 302
SOLUTION
561000
Computation of closing stock under perpetual inventory system
Using LIFO method, following will be stock ledger:

Date Receipts Issues Balance inventory

Dec. Qty. Rate Amount Qty Rate Amount Qty. Rate Amount
4 900 50 45,000 - - - 900 50 45,000
5 - - - 500 50 25,000 400 50 20,000
10 400 55 22,000 - - - 400 50 20,000
400 55 22,000
11 300 55 16,500 - - - 400 50 20,000
400 55 22,000
300 55 16,500
19 200 60 12,000 - - - 400 50 20,000
400 55
1003000 22,000
300 55 16,500
200 60 12,000
20 - - - 200 60 12,000
- - - 300 55 16,500
- - - 100 55 5,500 400 50 20,000
300 55 16,500
28 800 47 37,600 - - - 400 50 20,000
300 55 16,500

© The Institute of Chartered Accountants of India

 1.14 ACCOUNTING
4.14

28 800 47 37,600
29 - - - 500 47 23,500 400 50 20,000
300 55 16,500
300 47 14,100
50.601
Therefore, cost of closing inventory of 1,000 pcs will be ` 50,600.
Computation under periodic inventory system
In the above example, if the entity followed periodic inventory valuation, closing inventory of
1,000 pcs. will be valued as follows:
800 pcs. @ ` 47 each (purchased on Dec. 28th) = ` 37,600
200 pcs. @ ` 60 each (purchased on Dec. 19th) = ` 12,000
Total 1,000 pcs. = ` 49,600
We can see that cost of closing inventory has changed following LIFO method based on
perpetual inventory method and periodic inventory method.

"LIFO method is based on an irrational assumption that inventories entering last in the stores
are issued or consumed first. However, the flow of goods which is generally observed in
business entities is contradictory to this assumption. It should be noted that while applying
LIFO, there will be difference in cost of goods sold and value of closing inventory, if the entity
follows periodic as against perpetual method of inventory valuation. (Periodic and Perpetual
methods have been explained later in this chapter). Therefore, LIFO method is no longer
adopted for valuing inventories. Accounting Standards also does not permit the usage of LIFO
Method. Generally, in practice, FIFO and Weighted Average Price Method are popular among
the business entities and both these methods are also permitted by Accounting Standards."

(iv) Simple Average Price Method

Simple Average price for computing value of inventory is a very simple approach. All the
different prices are added together and then divided by the number of prices. The closing
inventory is then valued according to the price ascertained. This method is generally followed
by the entities using periodic inventory method as it does not require efforts of identifying
that closing inventory belongs to which consignments or lots.
ILLUSTRATION 4
In the same example of a manufacturer of radio sets given earlier, let us calculate the value of
closing inventory using Average Price Method:

© The Institute of Chartered Accountants of India

1100 5318 200 60 700 54231 800 47
1300 1500
A new WA is every time we make a purchase
calculated
while issuing we use the WA calculated during immediately precedingpurch
1.16 ACCOUNTING
4.16

40 55 800
SOLUTION
50400 52,510055
The computation of weighted average price in the referred example is shown below:
A new average rate would be calculated on receiving a fresh consignment. Answer on that
basis would be as under: 040 1 200 2000.525
ymM
Date Receipts Issues
1
Balance inventory
Qty Rate Amount Qty Rate Amount Qty Rate Amount
Dec. 4 900 50 45,000 - - - 900 50 45,000
Dec. 5 - - - 500 50 25,000 400 50 20,000
Dec. 10 400 55 22,000 - - - 800 52.5 42,000
Dec. 11 300 55 16,500 - - - 1,100 53.18 58,500
Dec. 19 200 60 12,000 - - - 1,300 54.23 70,500
Dec. 20 - - - 600 54.23 32,538 700 54.23 37,962 Issue

Dec. 28 800 47 37,600 - - - 1,500 50.37 75,562

get
Dec. 29 - - - 500 50.37 25,185 1,000 50.37 50,377

Perpetual and Periodic Inventory System and Average Methods of Cost of Inventory
Both Simple Average Method and Weighted Average Method are applied differently in case
the entity uses periodic inventory taking or Perpetual inventory taking. In case of periodic
inventory, taking inventory available for sale during the period is considered together and an
average rate is computed and closing inventory is valued using that rate. In case perpetual
inventory records, average rate of inventory is computed on each new purchase and next issue
is recorded using new average rate.
Illustration 5 above is an example of Weighted average method used in perpetual inventory
recording system. In case the entity would have been using periodic inventory recording system,
closing inventory would have been valued as below:
Details of purchases/receipt during the period

Date Qty. Rate Value

Dec. 4 900 50 45,000
Dec. 10 400 55 22,000
Dec. 11 300 55 16,500
Dec. 19 200 60 12,000
Dec. 28 800 47 37,600
Total 2,600 51.19 133,100

Accordingly, closing stock of 1,000 pcs. would have been valued at 51,190 @ ` 51.19 per unit.

© The Institute of Chartered Accountants of India

 INVENTORIES 4.17

5.2 Non-Historical Cost Methods

Non-historical cost methods do not consider the historical cost incurred to acquire the goods.
Non- historical cost methods include Adjusted Selling Price method and Standard Cost
method. Adjusted Selling Price method can be explained as follows:
(i) Adjusted selling price method
This method is also called retail inventory method. It is used widely in retail business or in
business where the inventory comprises of items, the individual costs of which are not readily
ascertainable. The use of this method is appropriate for measuring inventories of large
numbers of rapidly changing items that have similar margins and for which it is impracticable
to use other costing methods. The cost of the inventory is determined by reducing from the
sales value of the inventory an appropriate percentage of gross margin. The percentage used
takes into consideration inventory which has been marked below its original selling price. An
average percentage for each retail department is often used. The calculation of the estimated
gross margin of profit may be made for individual items or groups of items or by departments,
as may be appropriate to the circumstances.
ILLUSTRATION 6
Closico we e
M/s X, Y and Z are in retail business, following information are obtained from their records for
the year ended 31st March, 2022:
Goods received from suppliers
(subject to trade discount and taxes) ` 15,75,500

Trade discount 3% and GST 11%

Packaging and transportation charges ` 87,500
Sales during the year ` 22,45,500
Sales price of closing inventories ` 2,35,000
Find out the non-historical cost of inventories using adjusted selling price method.
SOLUTION
Determination of cost of purchases:

Goods received from suppliers 15,75,500

Less: Trade discount 3% (47,265)

15,28,235

© The Institute of Chartered Accountants of India

OS 0 sales SP 22.45.500
Purchase 1575.500

TD 31
11 35 closingstock sp 235.000
GST 11T 16.8.105 7696.340

Pack I transpch 87500

Gross Profit 696.660

Gross Profit Rate GrossProfit 100

sales CS
SP SP
696.660 100

2245.5007235000
28.09

C P St
71.91 2809 100
21 7191 235.000
211
1.68981

of
181
Cost
closing stock
 1.18 ACCOUNTING
4.18

Add: GST 11% ` 1,68,106

` 16,96,341
Add: Packaging and transportation charges ` 87,500
` 17,83,841

Determination of estimated gross profit margin:

Sales during the year ` 22,45,500

Closing inventory at the selling price ` 2,35,000
24,80,500
Less: Purchases ` (17,83,841)
Gross profit ` 6,96,659
Gross profit margin
Inventory valuation: 8
28.09%

Selling price of closing inventories ` 2,35,000

Less: Gross profit margin 28.09% ` (66,012)
` 1,68,988

ILLUSTRATION 7 4 15pm
From the following information, calculate the non historical cost of closing inventories using
adjusted selling price method: Tradingalc
salesSP a
os
`
Purchase 200000
isSP S
Sales during the year 2,00,000
GP
50000

Cost of purchases 2,00,000

Opening inventory Nil Gprate
180 50.000
Closing inventory at selling price 50,000

SOLUTION
AInenglish
Calculation of gross margin of profit: no
` 40001

Sales 2,00,000
Add: Closing inventory (at selling price) 50,000
Selling price of goods available for sale: 2,50,000
Less: Cost of goods available for sale 2,00,000
Gross margin 50,000

© The Institute of Chartered Accountants of India

 1.20 ACCOUNTING
4.20

consignee acts as an agent and does not take ownership of the goods; they are simply
responsible for selling them. Once the goods are sold, ownership transfers to the buyer.

Further, the adjustment of all goods must be on the basis of cost or NRV whichever is lower.
Suppose, a firm that closes its books on 31st December, carried out the inventory taking on
the 7th January next year and actual inventory was of the cost of ` 7,85,000, during the period
January 1 to 7 purchases were ` 1,53,000 and sales ` 2,50,000, the mark up being 25% on cost.
The inventory on 31st December would be ` 8,32,000 as shown below:

Inventory ascertained on January 7 7,85,000

Less: Purchases during the period Jan. 1 to 7 1,53,000
6,32,000
Add: Cost of goods sold during the period:
2,50,000 × (100/125) 2,00,000
8,32,000

ILLUSTRATION 8
From the following particulars ascertain the value of Inventories as on 31st March, 2022:

`
Inventory as on 1.4.2021
Purchases
312588
I 1,42,500
7,62,500
Manufacturing Expenses
Selling Expenses
aid 1,50,000
60,500
Administrative Expenses pa 30,000
Financial Charges 21,500
PIL
O
Sales 12,45,000

At the time of valuing inventory as on 31st March, 2021, a sum of ` 17,500 was written off on a
particular item, which was originally purchased for ` 50,000 and was sold during the year for
` 45,000. Barring the transaction relating to this item, the gross profit earned during the year
was 20 % on sales.
31 3
3121 es
Abnormal Goods Purchase Cost 50.000 14.2501g

losingstock lost 50.000

NRV 50000 17500 32.500 325
0

© The Institute of Chartered Accountants of India

 Trading 1.4 31.3
Normal Abnormal Normal Abnormal

Opening Stock 110000 50000 sales 1245.000 12.00.000 45.000

Purchases 76.2.500 lossonsale 5000
manufacturingexp 1.50.000 Closingstock 62.500 0
Gross Profit 2.40.000 Los

Normal 9 Abnormal

OS S 100 S
p Y
LOSS

GP201 20 GP 120 1
If
9 Normal 20
I Damage Abnormal 57.11 Loss

C P SP
80 20 100
2 240.000 12.00.000

Tak
OS C sales SP inventorf
P C
ME C CS COST

GP P
 INVENTORIES 4.21

SOLUTION
Statement of Inventory in trade as on 31st March, 2022

` `
Inventory as on 1st April, 2021 1,42,500
Less: Book value of abnormal inventory
(` 50,000 - ` 17,500) 32,500 1,10,000
Add: Purchases 7,62,500
Manufacturing Expenses 1,50,000
10,22,500
Less: Cost of goods sold:
Sales as per books 12,45,000
Less: Sales of abnormal item 45,000
12,00,000
Less: Gross Profit @ 20% 2,40,000 9,60,000
Inventory in trade as on 31st March, 2022 62,500

ILLUSTRATION 9
A trader prepared his accounts on 31st March, each year. Due to some unavoidable reasons, no
stock taking could be possible till 15th April, 2022 on which date total cost of goods in his godown
came to ` 50,000. The following facts were established between 31st March and 15th April, 2022.
(i) Sales ` 41,000 (including cash sales ` 10,000).
(ii) Purchases ` 5,034 (including cash purchases ` 1,990).

(iii) Sales return ` 1,000.

(iv) On 15th March, goods of the sale value of ` 10,000 were sent on sale or return basis to a

ff
customer, the period of approval being four weeks. He returned 40% of the goods on 10 th
April, approving the rest; the customer was billed on 16th April.
(v) The trader had also received goods costing ` 8,000 in March, for sale on consignment
basis. 20% of the goods had been sold by 31 st March, and another 50% by the
15th April. These sales are not included in above sales.
Goods are sold by the trader at a profit of 20% on sales.
You are required to ascertain the value of inventory as on 31st March, 2022.

its
Ephe
use
© The Institute of Chartered Accountants of India 1ft 401net 4000
60 app 6000
 Tradingalc 313 154
Opening
stock 313 793.66 Sales 41.000
Sales Return 1000
Purchases 5034 Goods sold on approval 6000 46000

GrossProfit 9200 ClosingStock 15 4 50.000

stock of consignment goods 2400

Goods Goods
Principal Agent Tp
sell
consignor consignee

i int
cost

80
Profit
20
selling
100
price
ffd
insales
9200 46.000

stock of goods as on 313

1116
2513 113 1014
2513s Debtor
5
1
IIe
Tosales skersed
recorded

311 sales
SP
ToDebtor

3113 Uosing CP
ToTrading
 Trad 3173 1514

488
so
1.22 ACCOUNTING
4.22

GP 20 onsales 11 is 50.000
SOLUTION
Statement of Valuation of Stock on 31st March, 2022
` `
Value of stock as on 15th April, 2022 50,000
th
Add: Cost of sales during the period from 31st March, 2022 to 15
April, 2022:

Less:
Sales (` 41,000-` 1,000)
Gross profit (20% of ` 40,000)
o
40,000
8,000 32,000
Cost of goods sent on approval basis (80% of ` 6,000) 4,800
86,800
Less: Purchases during the period from 31st March, 2022
to 15th April, 2022 5,034
Unsold stock out of goods received on consignment basis (30% of
` 8,000) 2,400 7,434
79,366

ILLUSTRATION 10

Inventory taking for the year ended 31st March, 2022 was completed by 10th April 2022, the
valuation of which showed a inventory figure of ` 16,75,000 at cost as on the completion date.
After the end of the accounting year and till the date of completion of inventory taking, sales
for the next year were made for ` 68,750, profit margin being 33.33 % on cost. Purchases for
the next year included in the inventory amounted to ` 90,000 at cost less trade discount 10 %.
During this period, goods were added to inventory at the mark up price of ` 3,000 in respect of
sales returns. After inventory taking it was found that there were certain very old slow-moving
items costing ` 11,250, which should be taken at ` 5,250 to ensure disposal to an interested
customer. Due to heavy flood, certain goods costing ` 15,500 were received from the supplier
beyond the delivery date of customer. As a result, the customer refused to take delivery and net
realizable value of the goods was estimated to be ` 12,500 on 31st March. Compute the value
of inventory for inclusion in the final accounts for the year ended 31st March, 2022.
SOLUTION
Statement showing the valuation of Inventory
as on 31st March, 2022
`
Value of Inventory as on 10th April 16,75,000
Add: Cost of goods sold after 31st March till Inventory taking 51,560
(` 68,750 – ` 17,190)

© The Institute of Chartered Accountants of India

 Trading a c 31 3 10.4
313 1634312 Sales 68750
Opening stock
Purchases 90000 sales Return 130001 65750
Trade Disc 10t19000 81.000

GrossProfit 1675500
16,438 Closing stock 10.4 cost
loss inventoryvaluedatNRV 6000
loss 11 11 3000

14210

lost Profit Price 15500 12500

selling
100 33.33 133.33
3 1 4
16438 65750