JAWAHARLAL NEHRU TECHNOLOGI CAL UNIVERSITY

SCHOOL OF MANAGEMENT OF STUDIES

Sub :financial accounting and analysis
Inventory valuation
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K s s veena

12021E0043

INVENTORY VALUATION
Introduction inventory(closing stock) style Click to edit Master subtitle is the property of the firm. Generally, inventory is the largest item of the current assets held by a trading or manufacturing business unit.

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Meaning held for sale in ordinary course of business in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services.

The term inventory means, ASSETS

Inventory includes

finished goods(saleable) work in progress(semi finished) materials and supplies(raw material),

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Types of inventories
Inventories

Manufacturin g concerns

trading concerns

Ram material s

Work in progress

Finished goods'

Finished goods

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Importance of inventory valuation

Determination Determination Disclosing Financial

of income of current profit

true financial position

analysis

Basis of inventory valuation Inventories are recognized as per matching concept inventories are valued at cost or net realized value which ever is less as per conservatism concept 3/5/13

Inventory valuation techniques

Inventory ,not ordinarily interchangeable

Inventory, ordinarily interchangeable

Specific identification method

Historical cost methods Averag e price Weight ed avg price

FLFO

LIFO

Nonhistorical cost methods Base stock

Standard cost

Adjusted selling price

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Latest purchase price

specific identification method

Under this method, each cost incurred to bring inventory to its present location and condition is identified separately and taken cost of that inventory

Historical cost methods

FIFO(first in first out) method
This method assumes that the item received first are issued first so that the latest item are in stock In this method, an issue is valued at the oldest rate , while the closing stock is valued at the latest rate

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LIFO(LAST IN FIRST OUT) METHOD

This method is just opposite of FIFO It assumes that items received last are issued first so that the earlier items are in stock.

SIMPLE AVERAGE PRICE

In this method all the different prices are added together and then divided by the number of prices .
sum of the prices of different items in stock

Simple average price =

number of prices

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WEIGHTED AVERAGE PRICE

cost of goods available for sale during the period is aggregated and then divided by number of units available for sale during the period, to calculate weighted average price per unit.

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 NON

HISTORICAL COST METHODS

ADJUSTED SELLING PRICE METHOD

This method is also called as retail inventory method The cost of inventory is determined by reducing appropriate percentage of gross margin from the sales value of the inventory
Value of inventory= selling price of inventory -gross profit

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