Chapter 8: Accounting and Valuation of Inventory

Solutions to Problems and Cases

1. Finding the missing numbers:

Particulars P Limited Q Limited R Limited

Sales 12200 11250 45100

Opening Stock 1700 2340 8300
Purchases 7280 15780 37180
Closing Stock 1700 4720 7240
Cost of Goods Sold 7280 13400 38240
Gross Profit 4920 (2150) 6860
Operating Expenses 1720 4200 8110
Profit/ Loss Before Tax 3200 -6350 (1250)

Use equation:

Cost of Goods Sold = Opening Stock + Purchases – Closing Stock

2. Impact of inventory costing method:

a) FIFO

b) LIFO

c) FIFO

d) Average Cost

3. Error in Inventory Valuation:

The restated Profit & Loss Statement of Ace Trading Limited for the years 2016 and

2017 is given below:

Particulars 2016 2017

(`’000)
 Sales 54,320 64,100
Expenses
Opening Stock 11,230 16,700
+ Purchases 37,310 32,250
Less : Closing Stock 16,700 15,780
Manufacturing & Other Expenses 18,700 21,360
Total Expenses 50,540 54,530
Profit Before Tax 3,780 9,570

4. Periodic Inventory System:

Quantity Cost per unit (`)

Beginning Inventory 230 12000

Purchases 900 12800

Sale ` 14,400,000.

Closing Stock 170 units

a.

a) Cost of Goods Available for Sale = Opening Stock + Purchases = `2,760,000 +

`11,520,000 = `14,280,000

b) Ending Inventory

LIFO = 170 x `12,000 = `2,040,000 (Last purchases are used first)

FIFO = 170 x `12,800 = `2,176,000 (First purchases are used first)

Average Cost = 170 x `12,637 = `2,148,290 (Average Cost = `14,280,000 / 1130)

c) Cost of Goods Sold = Cost of Goods Available for Sale – Closing Inventory

LIFO = `14,280,000 - `2,040,000 = `12,240,000

 FIFO = `14,280,000 - `2,176,000 = `12,104,000

Average Cost = `14,280,000 - `2,148,290 = `12,131,710

d) Gross Profit = Sales – Cost of Goods Sold

LIFO = `14,400,000 - `12,240,000 = 2,160,000

FIFO = `14,400,000 - `12,104,000 = 2,296,000

Average Cost = `14,400,000 - `12,131,710 = 2,268,290

5. Lower of Cost or Net Realizable Value: Net Realizable Value = Expected Sales

Price – Salesman commission = `12200 – `500 = `11,700

As the NRV is less than the cost price, the closing inventory will be valued at the lower

of the two. Accordingly Closing Inventory will be `1,989,000.

The Cost of Goods Sold = `14,280,000 – `1,989,000 = `12,291,000

Gross Profit = `14,400,000 – `12,291,000 = `2,109,000

6. Lower of cost or net realizable value

A. Net Releasable Value (12-10), cost is lower
B. NRV (100-20) is lower than the cost
C. Cost is lower than the NRV
D. NRV is lower than the cost

7. FIFO Method

  Receipt Issued Balance

Date No of Cost Per Value No of Cost Per Value No of Cost Per Value
Units Unit Units Unit Units Unit
1st October      
(Opening Balance) 500 450 225,000 500 450 225,000
                   
7th October      
250 450 112,500 250 450 112,500
                   
25th October      
300 460 138,000 250 450 112,500
             
300 460 138,000
                   
4th November      
200 440 88,000 250 450 112,500
             
300 460 138,000
             
200 440 88,000
                   
15th November      
250 450 112,500 250 460 115,000
       
50 460 23,000 200 440 88,000
                   
23rd November      
200 460 92,000 50 460 23,000
             
200 440 88,000
                   
4th December      
400 480 192,000 50 460 23,000
             
200 440 88,000
             
400 480 192,000
                   
16th December        
50 460 23,000    
         
200 440 88,000    
       
90 480 43,200 310 480 148,800
                   
20th December      
120 480 57,600 190 480 91,200
                   
24th December      
300 500 150,000 190 480 91,200
             
300 500 150,000
               
   
Total    
1,700 793,000 1,210 551,800 490   241,200

Opening Stock: 500 Units @ 450 = 225,000

Purchases: 1200 Units 568,000

Total 1700 Units 793,000

Issued 1210 Units 551,800

Closing Stock 490 Units 241,200

8. LIFO Method

  Receipt Issued Balance

Date No of Cost Per Value No of Cost Per Value No of Cost Per Value
Units Unit Units Unit Units Unit
1st October      
(Opening Balance) 500 450 225,000 500 450 225,000
                   
7th October      
250 450 112,500 250 450 112,500
                   
25th October      
300 460 138,000 250 450 112,500
             
300 460 138,000
                   
4th November      
200 440 88,000 250 450 112,500
             
300 460 138,000
             
200 440 88,000
                   
15th November      
200 440 88,000 250 450 112,500
       
100 460 46,000 200 460 92,000
                   
23rd November      
200 460 92,000 250 450 112,500
                   
4th December      
400 480 192,000 250 450 112,500
             
400 480 192,000
                   
16th December      
340 480 163,200 250 450 112,500
             
60 480 28,800
                   
20th December        
60 450 27,000    
       
60 480 28,800 190 450 85,500
24th December      
300 500 150,000 190 450 85,500
             
300 500 150,000
               
   
Total    
1,700 793,000 1,210 557,500 490   235,500

Opening Stock: 500 Units 225,000

Purchases: 1200 Units 568,000

Total 1700 Units 793,000

Issued 1210 Units 557,500

Closing Stock 490 Units 235,500

Weighted Average Method

  Receipt Issued Balance

Date No of Cost Per Value No of Cost Per Value No of Cost Per Value
Units Unit Units Unit Units Unit
1st October      
(Opening Balance) 500 450 225,000 500 450 225,000
                   
7th October      
250 450 112,500 250 450 112,500
                   
25th October      
300 460 138,000 550 455 250,500
                   
4th November      
200 440 88,000 750 451 338,500
                   
15th November      
300 451 135,400 450 451 203,100
                   
23rd November      
200 451 90,267 250 451 112,833
                   
4th December      
400 480 192,000 650 469 304,833
                   
16th December      
340 469 159,451 310 469 145,382
                   
20th December      
120 469 56,277 190 469 89,105
                   
24th December      
300 500 150,000 490 488 239,105
                   
Total      
 1,700 793,000 1,210 553,895 490 239,105

Opening Stock: 500 Units 225,000

Purchases: 1200 Units 568,000

Total 1700 Units 793,000

Issued 1210 Units 553,895

Closing Stock 490 Units 239,105

Case 8.1: Drink Well Beer Limited: Accounting for Empty Bottles

1. The issues to be discussed are – should the empty bottles be recorded as an inventory and second
if yes at what value.

As the empty bottles are being held for the purpose of resale they should be included in
inventory.

The principle of valuation is `lower of cost or net realizable value’. The cost being nil, they shoid
be shown at negligible value.

Accordingly alternative c) is preferable.

2. Impact:
a. Not appearance in the Balance Sheet, profit will be booked at the time of sale.
b. Appearance in the Balance Sheet at `12 million. Accordingly profit also gets booked
now. At the time of sale the difference between sale price and `12 million will be booked
as a profit or loss.
c. Appears in the Balance Sheet at `1. Profit gets recorded at the time of sale.

Case 8.2: The Bombay Dyeing and Manufacturing Company Limited:

To show the application of lower of cost or net realizable value

1. The realizable value of raw material is ascertained by reducing the cost of completion and sales
from the estimated sales price. As per AS 2 material held for use in the production are not written
down below cost if the finished product in which they will be used are expected to be sold at or
above cost. However if there has been a decline in the price of materials and it is estimated that
the cost of the finished goods will exceed the net realizable value the material are written down to
net realizable value. In such circumstances the replacement cost of the material may be the best
available measure of their net realizable value.
2. Because of the provisioning the profit for the year 2002-03 declined by `12.86 crores and profit
for the year `2003-04 is higher by the same amount.
3. Balance Sheet – Inventory is undervalued in the year 2002-03 and due to lower profits the
Reserves & Surplus are also lower by the same amount. The situation got rectified in Balance
Sheet of 2003-04.