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Inventory Valuation
Inventory Valuation
Inventory Valuation
Meaning:
For Inventory valuation, cost may mean historical, current or
standard cost. Historical costs represents the cost actually incurred
at the time of acquisition. Current replacement cost represents the
replacement price on the date of its consumption. Standard cost
represents the predetermined cost that should be incurred at a given
level of efficiency and capacity utilization.
Inventory Systems:
Periodic Inventory System: It is a method of ascertaining
inventory by taking an actual physical count of all inventory items
on hand at a particular date on which information about inventory
is required. The cost of goods sold is calculated as a residual figure
(which includes lost goods also) as follows:
Cost of Goods sold= Opening inventory + Purchases Closing
stock
Perpetual Inventory System:
It is a method of recording inventory balances after each receipt
and issue in order to ensure accuracy of perpetual inventory
records, physical stocks should be checked and compared with
recorded balances. The discrepancies should be investigated and
adjusted properly in accounts.
The closing inventory is calculated as a residual figure (which
includes lost goods also) as follows:
Closing Inventory = Opening Inventory + Purchases cost of
goods sold
goods sold, therefore ,consists of the earliest lots and are valued at
the price paid for such lots. The ending inventory consists of the
latest lots and is valued at the price paid for such lots. The ending
inventory is stated in the Balance Sheet at a value nearer the
current market price.
LIFO Method:
It is based on the assumption that the goods which are received last
are issued first. This assumption is made for the purpose of
ascertaining cost and not for the purpose of physical flow of goods.
Therefore the goods sold consists of the latest lots and are valued
at the price paid for such lots. The ending inventory consists of the
earliest lots and is valued at the price paid for such lots. The ending
inventory is understated in the Balance Sheet at old cost.
LIFO
Goods received last
are issued first
2.Cost of Goods
sold
3.Distortion in
Balance sheet
Illustration:
Date
Inventory No. of
units
1 Jan.
Purchase 500
5 Jan.
Purchase 1000
10 Jan.
Purchase 2000
15 Jan.
Purchase 1000
20 Jan.
Purchase 3000
25 Jan.
Purchase 2000
Total
9500
Inventory
11 Jan.
Sales
14 Jan.
Sales
16 Jan.
Sales
21 Jan.
Sales
30 Jan.
Sales
TOTAL
Cost per
unit(Rs.)
3
4
5
6
4
7
Amt(Rs.)
1500
4000
10000
6000
12000
14000
47500
Units
1000
500
1000
2000
1500
6000
Quantity
sold
1000
14 Jan.
16 Jan
21 Jan.
500
1000
2000
30 Jan.
1500
Total
6000
Sales
Inventory 3500
Quantity
break up
500
500
500
1000
1000
1000
1500
Rate
Amt
X3
X4
X4
X5
X5
X6
X4
1500
2000
2000
5000
5000
6000
6000
1500
2000
X4
X7
6000
14000
Total
Amt(Rs.)
3500
2000
5000
11000
6000
27500
20000
Total
9500
47500
Quantity
break up
1000
Rate
Amt
11 Jan.
Quantity
sold
1000
X5
5000
Total
Amt(Rs.)
5000
14 Jan.
16 Jan
21 Jan.
500
1000
2000
500
1000
2000
X5
X6
X4
2500
6000
8000
2500
6000
8000
30 Jan.
1500
Total
6000
Sales
Inventory 3500
1500
X7
10500
10500
32000
500
1000
500
1000
500
X3
X4
X5
X4
x7
1500
4000
2500
4000
3500
Total
9500
15500
47500
Matching Concept
Meaning:
Matching is the entire process of periodic earnings measurement,
often described as a process of matching expenses with revenues.
In a narrow sense, this means deducting from the revenues of a
period the cost of goods sold or other expenses that can be
identified with such revenues of that period on the basis of cause
and effect.
To ascertain the amt of profit or loss made or suffered during a
particular period proper matching of revenue is required to be done
with the expenses.
It will be appropriate here to understand the meaning of following
terms:
Revenue: Income of recurring nature from any source. Source may
be sale of goods, performance of service for a customer, the rental
for a property etc.
Expense: The term expense denotes the cost of services and things
used for generating revenue
Replacement Approach:
Sales
Rs.30
Less: Replacement cost of goods sold Rs.25
Rs.5
Add: Profit realized from market
fluctuations and price level changes Rs.5
Total Profit
Rs.10
In both the cases profit is Rs. 10 but, replacement cost approach
gives a better analysis of profit earned by a business.
So, Replacement cost approach is preferred to Traditional
Approach