Accounting Standard Checklist AS 2 Valuation of Inventories

No

Particulars

Response

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1 Obtain a complete list of the following : 4 Inventory items and codes 4 4 4 4 4 Note on procedure for valuing inventory Inventory valuation statement as at valuation date. Groups Cost sheets (if the volume if high, sample check and append a note) Note on method of determining net realisable prices (NRV)

2 Ensure that only the following are considered as inventories: 4 4 4 Assets held for sale in the ordinary course of business. Assets which are in the process of production for such sale. Assets in the form of materials or supplies to be consumed in the production process or rendering of services.

3 Verify and corroborate the above with the following to the extent deemed necessary: 4 4 The business and product profile of the enterprise. The production process.

4 Ensure that the following are not considered as inventories for the purposes of this Standard: 4 4 4 4 4 Work-in-progress arising under construction contracts. Work-in-progress arising in the ordinary course of business as service providers. (However, finished goods in respect of service providers are to be considered). Shares, debentures and other financial instruments held as stock-in trade. Inventories of livestock, agricultural and finished products. Machinery spares. (Refer ASI 2)

5 Has the inventory been valued at the lower of cost and net realisable value? 6 Ensure that the cost of inventories comprises of the following: 4 4 4 Cost of purchase. Cost of conversion. Other costs necessary to bring the inventory to its present location and condition.

7 Obtain the particulars of major raw materials used in respect of each of the inventory items from the cost sheet.

8 In respect of the above, ensure that the purchase price includes the following: 4 4 Duties and taxes ( other than those which are subsequently recoverable i.e. rebates) Transport, handling and other costs which are directly attributable to the purchases.

9 Ensure that the details as per (8) above are based on the Purchase Orders, suppliers / transporters invoices and other appropriate documentary evidence. 10 Has the purchase cost been identified against each individual item of inventory? 11 If the answer to (10) above is in the negative, inquire into the basis of allocation and apportionment. Append a note, if necessary. 12 Ensure that the above basis is reasonable, appropriate and consistent. 13 Is the enterprise entitled to any of the following in respect of raw materials purchased? [ as per (8) earlier]: 4 4 4 Trade discounts. Rebates. Duty drawbacks and other similar claims.

14 Ensure that the above are excluded whilst determining the cost of purchase. 15 Ensure that the details as per (13) above are based on the purchase orders, contracts and the relevant statutes, if any.

16 Based on the cost sheets, ascertain the costs of conversion (i.e. overheads) for each item of inventory. 17 Ensure that only the following are considered as costs of conversion: 4 4 4 Direct labour. Fixed production overheads. Variable production overheads.

18 Obtain the details of the various fixed production overheads from the cost sheets. 19 Ensure that only the costs of production which are constant regardless of the volume of production are considered as part of fixed overheads. 20 Review the basis, adequacy, justification and nature of the components of (19) above, with the trial balance, organisation structure, locational profile, production process etc. 21 Obtain a note on the basis of allocation of fixed production overheads. 22 Obtain the details of the normal level of production for each of the products manufactured by the enterprise. 23 Review the above based on the installed capacity / normal activity level and the actual production / activity level over the past few years / accounting periods under normal business conditions and obtain a written justification for the any changes thereon during the year/ period and evaluate the same for reasonableness, based on our understanding of the industry and environment in which the enterprise operates. Obtain an independent opinion from a technical expert, if deemed necessary.

24 Are the fixed overheads allocated on the basis of the normal level of activity / production? 25 Obtain the computation in respect of (24) above and check the computation of the overhead allocation rate as detailed in the Appendix. 26 Ensure that the overhead allocation factors used (as indicated in the Appendix) are reasonable in relation to the nature of the item. 27 Obtain the details of the various variable production overheads from the cost sheet. 28 Ensure that only those indirect costs of production which vary directly or indirectly with the volume of production are considered as variable production overheads. 29 Review the basis, adequacy, justification and nature of the components of (28) above, with the trial balance, organisation structure, locational profile, production process etc. 30 Obtain a note on the basis of allocation of variable production overheads. 31 Obtain the details of the actual level of production for each of the products manufactured by the enterprise. 32 Review the above based on the production records, excise records and other appropriate documentary evidence.

33 Are the variable overheads allocated based on the actual level of production? 34 Check the computation in respect of (33) above. 35 Obtain a certified list of the following: 4 4 4 Joint products. By products. Non re-usable waste.

36 Ensure that only products which emerge from the same production process and are of significant value are considered as joint products. 37 Review the above based on the production process and evaluate the same for reasonableness based on our understanding of the industry in which the enterprise operates. Obtain an independent opinion from a technical expert, if deemed necessary. 38 Ensure that only products which emerge from a process along with one or more main products which are incidental and of insignificant value are considered as by-products.

39 Review the above based on the production process and evaluate the same for reasonableness based on our understanding of the industry in which the enterprise operates. Obtain an independent opinion from a technical expert, if deemed necessary. 40 Are the costs of conversion of by-products and joint products separately identifiable? 41 If the answer to (40) above is in the negative, obtain a note on the basis of allocation thereof. 42 Ensure that the basis of allocation is reasonable and consistent. (Refer to Appendix II for an illustrative list of the basis of allocation, since the Standard does not specify any specific method.) 43 Based on the cost sheets, ascertain any other costs (non production overheads) which are considered as part of inventory. 44 Ensure that the above comprises only of the following: 4 4 4 4 Costs incurred to bring the inventory to their present location and condition. Costs of designing in respect of items manufactured for special customers. Depreciation on fixed assets used in the production process. Amortisation of intangible assets like patents, licences etc. used in the manufacture or providing of services.

45 Review the basis, adequacy, justification and nature of the components of (44) above, with the trial balance, organisation structure, locational profile, production process etc. 46 Ensure that the allocation of the above costs is on the same basis as indicated earlier, depending upon whether it is a fixed or variable overhead. 47 Is the enterprise involved in the manufacture of any other item which falls within the definition of a qualifying asset under AS-16? 48 If the answer to (47) above is in the affirmative, ensure that the borrowing costs are included therein in accordance with AS-16. (Complete the relevant checklist). 49 Ensure that the following items are excluded from the cost of inventory: 4 4 4 4 Abnormal loss on use of materials and labour. Storage costs in respect of finished products. Administrative overheads other than those as per (43) above. Selling and distribution overheads.

50 Obtain the details of the Net realisable Value (NRV) for each item of inventory. 51 Ensure that the NRV is computed as per the method indicated in APPENDIX II and check the computation thereof.

52 Ensure that the NRV is based on the sales order, invoices or other documentary evidence. 53 Has a statement been prepared to compare the cost and NRV for: 4 4 Each item of inventory. Groups of similar items.

54 Verify the above statement and ensure that the valuation is proper and consistent. In case of any material change, compute the financial impact thereof for disclosure. 55 If the comparison as per (53) above is for group of items, ensure whether: 4 4 The items relate to the same product line. The items are produced and marketed in the same geographical area.

56 The details as per (55) above should be corroborated with the product profile, marketing and distribution set up, customer profile or any other appropriate evidence. 57 Has the enterprise adopted either of the following methods for determining the cost of inventories? 4 4 4 FIFO or Weighted Average if the business is of a general nature. Specific Identification if goods are made for a specific purpose or project and are not ordinarily interchangeable Adjusted Selling Price In respect of retail business or business where costs are not readily ascertainable.

58 Ensure that appropriate selection is made in respect of the above.

59 Ensure that the following disclosures have been made: 4 4 4 4 The accounting policy for valuation of inventories. The cost formulae used. Total carrying amount of Inventories Classification of Inventories, appropriate to the enterprise, generally as given below: Raw Materials and components Work-in-progress Finished Goods Stores and Spares Loose tools
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Accounting Standard Checklist AS 2 Valuation of Inventories

No

Particulars

Response

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APPENDIX I

BASIS OF LLOCATION OF OVERHEADS

Overhead Allocation Rate = Total Overheads (Annualised) Overhead Allocation Factor Overhead alloaction factor could be either of the following: (only illustrative) 4 4 4 Number of Employees. Normal units of production. Machine hour rate.

APPENDIX II

BASIS OF ALLOCATION FOR JOINT PRODUCTS AND BY PRODUCTS

JOINT PRODUCTS: Relative sales value of each product at the stage in the production process when: 4 4 Products become separately identifiable. On completion of the production. BY PRODUCTS: At net realisable value which is deducted from the cost of the main product. The net realisable value is computed as under: Sales value Less: separate processing costs Less: packing and distribution costs Less: reasonable profit

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