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Lectures Stock-Complete in Taxation
Lectures Stock-Complete in Taxation
In the case of any business the Federal Board of Revenue (FBR) is empowered
prescribe the manner in which firm has to maintain accounts and record payments of
business transactions (i.e. on accrual basis or on cash basis)
Cash-Basis Accounting
According to the Income Tax Ordinance, 2001 Cash-Basis Accounting means such
method in which income and expenditures are accounted for when cash is actually
received or paid.
Accrual-Basis Accounting
According to the Income Tax Ordinance, 2001 Accrual-Basis Accounting means such
method in which income and expenditures are accounted for when they derived or
incurred. OR
Income and expenditures are accounted for when they become receivable or payable.
Example-1
Solution:
COST OF STOCK-IN-TRADE
Stock-in-Trade
According to the Section 35 of the Income Tax Ordinance, 2001 value of opening stock
is determined differently in following two situations:
1. If Business was commenced before the start of the Tax Year under
consideration:
If Business was commenced before the start of the Tax Year for which the
opening stock is to be valued, the Value of Closing Stock of the previous year will
be considered as the value of Opening Stock of the current year under
consideration; e.g. the value of closing stock as at 30-06-2018 was 200,000. The
value of opening stock for the Tax Year 2019; i.e. as at 01-07-2018 will be
considered as the same as it was at the closing of Tax Year 2018; i.e. Rs.
200,000.
2. BUT if Business was commenced after the start of the Tax Year under
consideration:
If business was commenced after the start of the Tax Year and an stock was
purchased before that commencement and the company wants to used the same
for business purpose, such stock will be considered as opening stock of the
business and valued at Fair Market Value of the Stock at the date at which the
stock will be used / introduced for the business purpose.
Cost of an item of Stock-in-trade = Direct Material costs + Direct Labor Costs + Factory
Overheads
It means the total cost of manufacturing stock-in-trade less direct labor costs and direct
material costs; i.e.
Factory Overhead Costs = Total manufacturing cost – Direct Material cost – Direct
Labor cost
First-in-First-Out Method
Items which are acquired first will be sold first and items which are acquired later will be
sold later.
Example-2
Company purchased a stock contains 100 units of Rs. 20 each then 50 units of Rs. 25
each and then 15 units of Rs. 22 each. Now company has closing stock of 30 units.
Calculate the cost of stock by using weighted average and FIFO methods.
Solution:
FIFO Method
As the company purchased total 165 units with the sequence of 100 then 50 then last
15 units. Now the company has closing stock of total 30 units according to FIFO method
these 30 units should be from last purchase15 units of Rs. 22 each and from 2 nd last
purchase of 50 units of Rs. 25 each. Therefore the value of stock
Closing value of stock is lower of the cost or net realizable value of the stock-in-trade on
hand at the end of the year.
Example-1
Cost of closing stock is Rs. 150,000. Selling price is Rs. 350,000, labor and other cost
of completion is Rs. 100,000, Selling expenses are Rs. 50,000. You have to calculate
value of closing stock-in-trade.
Solution:
As the cost of Rs. 150,000 is less than NRV of Rs. 200,000 (W-1) therefore cost of
closing stock-in-trade will be taken as its value.
(W-1)
Explanation
Equation-1:
OR
Selling price = Profit + Cost of Material in hand + Cost of Material further required till
completion + Labor required for completion + Overheads required for completion +
Selling expenses
OR
Selling price – Cost of completion – Selling expenses = Profit + Cost of Material in Hand
If cost will be lower than NRV than it will be taken as value of closing stock if NRV will
be lower than cost it means the product is in loss in that case NRV will be taken as
value of closing stock.
The value of stock-in-trade disposed off during a tax year shall be determined as below:
A+B-C = D
Where: