Accounting standard 2
- 1. ACCOUNTING STANDARD -2 VALUATION OF INVENTORIES PRESENTED BY : ASHISH KANNAN ROHIT KASHIF SUPRIYA SARITA ANAMIKA
- 2. 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 and working progress). In the form of materials and supplies to be consumed in the production process or in the rendering of services (Stores, Spares, Raw material). Inventories do not include machinery. Inventories should be valued at the lower of cost and net resale value Net realizable value is : is the estimated selling price in the ordinary course of business less less the estimated costs of completion and the estimated costs necessary to make the sale.
- 3. OBJECTIVE Formulate the method of computation of cost of inventories/stock. Determining the value of closing stock at which it is to be shown in balance sheet till it is not sold and recognized as revenue. Determination of cost of Inventories Determination of net realizable value of inventories Comparison between the cost and net realizable value APPLICATIONS work in progress arising under construction contracts, including directly related service contracts; work in progress arising in the ordinary course of business of service providers; shares, debentures and other financial instruments held as sk in trade; and producers' inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realizable value in accordance with well established practices in
- 4. COST PURCHASE PRICE • Duty and Purchase Price • Taxes • Freight Inward • Other Expenditure directly attributable to the acquisition. Less : • Duties and taxes recoverable by enterprises from taxing authorities • Trade discount • Duty Drawback • Rebate COST OF CONVERSION It Consists of the cost directly related to the units(Direct Labor, Direct Material, Direct Expenses) Systematic allocation of fixed and variable production overheads that are incurred in converting material into finished goods.
- 5. Other Costs Cost incurred in bringing the inventories to their present location and condition Excise duty contributes directly to bringing the inventories to its present location and condition Excise duties is direct costs, which should be included in the valuation of inventories
- 6. Methods of computing Inventories
- 7. Using non-cost methods to value inventory (Lower of Cost Method) If market price drops below purchase price. Inventory is cost at a lower price than the purchase price. Reasons :- Damaged, Obsolete Products. Method allows declines in inventory value to be offset against income of the period.
- 8. Estimation of Inventory cost For certain businesses, physical inventory is impractical or impossible. For such Businesses :- 1. Retail inventory method = Cost Retail Price 2. Gross profit (or gross margin) method = It uses previous years gross profit margin. Estimation of Inventory using sap Inventory can be estimated using Computer Software Like SAP. General codes are MB51,MMBE,MB52 etc.
- 9. First-in, First-out (FIFO) This method assumes that the first unit acquired are the first 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 on the bases of old price that are possibly unrealistic
- 10. Last-in, First-out(LIFO) This method assumes that the last unit acquired are the first unit sold The cost of the units in the ending inventory is that of the earliest purchases The chief advantage of LIFO is that balance sheet value of inventories may be outdated and unrealistic
- 11. Weighted average Cost This method assumes that the goods available for the sale are homogeneous The average cost is computed by dividing the cost of goods available for sale by the number of the units available by sale The major criticism of WAC is that it assigns no more importance to current prices than to past prices paid several months ago
- 12. Disclosure The financial statement should disclose: a) The accounting policies adopted in measuring inventories, including the cost formula used. b) The total carrying amount of inventories & its classification appropriate to the enterprise.