Invention valuation

Question 1
Jan purchased

1-1-2020 200 kg @ 2/

2-1-2020 300 kg @ 2.5

3-1-2020 400 kg @ 3

4-1-2020 issue 650kg

5-1-2020 purchase 200 kg @ 1.5

6-1-2020 issue 400 units

FIFO (FIRST IN FIRST OUT)

Perpetual system follows

Date Purchase Issue Balance

Unit Rate Amount Unit Rate Amount Unit Rate Amount

1-1- 200 2 400 200 2 400

2020

2-1- 300 2.5 750 200 2 400

2020 300 2.5 750

3-1- 400 3 1200 200 2 400

2020 300 2.5 750
400 3 1200

4-1- 200 2 400 250 3 750

202 300 2.5 750
150 3 450
5-1- 200 1.5 300 250 3 750
2020 200 1.5 300

6-1- 250 3 750 50 1.5 75

2020 150 1.5 225

LIFO (LAST IN FIRST OUT)

Date Purchase Issue Balance

Unit Rate Amount Unit Rate Amount Unit Rate Amount

1-1- 200 2 400 200 2 400

2020

2-1- 300 2.5 750 200 2 400

2020 300 2.5 750

3-1- 400 3 1200 200 2 400

2020 300 2.5 750
400 3 1200

4-1- 400 3 1200 200 2 400

202 250 2.5 625 50 2.5 125

5-1- 200 1.5 300 200 2 400

2020 50 2.5 125
200 1.5 300

6-1- 200 1.5 300

2020 50 2.5 125
150 2 300
AVERAGE METHOD (we need focus on only price average
of anything)
Average formula
=price of total/numbers of price
1+2/2=1.5

Date Purchase Issue Balance

Unit Rate Amount Unit Rate Amount Unit Rate Amount

1-1- 200 2 400 200 2 400

2020

2-1- 300 2.5 750 200 2 400

2020 300 2.5 750

3-1- 400 3 1200 200 2 400

2020 300 2.5 750
400 3 1200

4-1- 650 2.5 250 2.5

202

5-1- 200 1.5 300 250 2.5 625

2020 200 1.5 300

Weighted Average Cost

Formula
= ∑amount /∑units
Date Purchase Issue Balance

Unit Rate Amount Unit Rate Amount Unit Rate Amount

1-1- 200 2 400 200 2 400

2020

2-1- 300 2.5 750 200 2 400

2020 300 2.5 750

3-1- 400 3 1200 200 2 400

2020 300 2.5 750
400 3 1200

4-1- 650 2.611 1697.15 250 2.611 652.75

202

5-1- 200 1.5 300 250 2.611 652.75

2020 200 1.5 300

6-1- 400 2.18 872 50 2.18 109

2020
Example 1:
You are required to value the inventory by FIFO (Perpetual System). Opening
Inventory is 8 Units at Rate of Rs. 10 at start of December and during the year the
following were the purchases and sales of inventory:

 
Solution:

2.2.2 Last in First Out (LIFO)

 The last-in, first-out inventory costing method is based on the assumption that the last items
received were the first items sold. In other words, the most recent purchases are assumed to be
sold first and the old goods remain in inventory. However, the assumed flow of goods can differ
from the actual physical flow. During inflationary times, recent costs are higher than old costs,
resulting in higher cost of goods sold, lower net income, and lower income taxes.
 
Example 2:
You are required to value the inventory by LIFO (Perpetual System). Opening Inventory is 8
Units at Rate of Rs. 10 at start of December and during the year the following were the purchases
and sales of inventory:

Solution:

2.2.3 Average or Weighted Average

The weighted-average inventory costing method uses a weighted-average cost per
inventory unit in assigning cost to units sold and to inventory. A weighted-average is
recalculated at the time of each purchase.
 
Example 3:
You are required to value the inventory by weighted average (Perpetual System).
Opening Inventory is 8 Units at Rate of Rs. 10 at start of December and during the
year the following were the purchases and sales of

Solution:
Results Variation in Inventory Valuation Methods
Each method is based on a different assumption about the cost of the merchandise that
are sold and the cost of the merchandise that are left in ending inventory:

Impact of LIFO and FIFO in Periods of Rising

Prices
Following are some impact on financial by using LIFO or FIFO:
Cost flow Assumption under Periodic Inventory
System
In physical inventory system stock taking are done at the end of period. No up-to-date
record for cost of sales are available. In this type of problems issuing date are not mention.
Example 4:
You are required to value the inventory (Cost of Sales and Ending Inventory) by
FIFO, LIFO and Weighted average (Periodic System) and Comparative Cost Sheet in
amount:
Date         Units @            Total
1 Jan   Balance   100   @ 10  Rs. 1,000
5 Jan   Purchases   100 @ 11       1,100
10 Jan  Purchases 150  @ 12        1,800
During the period 300 unit were sold @ Rs. 15 per unit
 
Solution:
How to Calculate the NRV

The calculation of the NRV can be broken down into the following steps:

1. Determine the market value or expected selling price of an asset.

2. Find all costs associated with the completion and the sale of an asset
(cost of production, advertising, transportation).
3. Calculate the difference between the market value (expected selling
price of an asset) and the costs associated with the completion and sale
of an asset. It is a net realizable value of an asset.

Mathematically, the net realizable value can be found through the following
equation:

However, the net realizable value is also applicable to accounts receivables.

For the accounts receivable, we use the allowance for doubtful accounts
instead of the total production and selling costs.

Example of Calculating the NRV

Company ABC Inc. is selling the part of its inventory to Company XYZ Inc. For
reporting purposes, ABC Inc. is willing to determine the net realizable value of
the inventory that will be sold.
The expected selling price of the inventory is $5,000. However, ABC Inc. needs
to spend $800 to complete the goods and an additional $200 for
transportation expenses. Considering the available information, the net
realizable value of the inventory should be calculated in the following way:

NRV  =  $5,000 – ($800 + $200)  =  $4,000

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