1. Inventory valuation is important for accurately assessing a company's liquidity, income, and financial position.
2. Common inventory systems include periodic inventory, which requires physical counts at set times, and perpetual inventory, which continuously updates inventory records with each transaction.
3. Popular inventory valuation methods include FIFO, LIFO, weighted average, and specific identification, each treating the cost of goods sold differently and thereby impacting reported income.
1. Inventory valuation is important for accurately assessing a company's liquidity, income, and financial position.
2. Common inventory systems include periodic inventory, which requires physical counts at set times, and perpetual inventory, which continuously updates inventory records with each transaction.
3. Popular inventory valuation methods include FIFO, LIFO, weighted average, and specific identification, each treating the cost of goods sold differently and thereby impacting reported income.
1. Inventory valuation is important for accurately assessing a company's liquidity, income, and financial position.
2. Common inventory systems include periodic inventory, which requires physical counts at set times, and perpetual inventory, which continuously updates inventory records with each transaction.
3. Popular inventory valuation methods include FIFO, LIFO, weighted average, and specific identification, each treating the cost of goods sold differently and thereby impacting reported income.
1. Inventory valuation is important for accurately assessing a company's liquidity, income, and financial position.
2. Common inventory systems include periodic inventory, which requires physical counts at set times, and perpetual inventory, which continuously updates inventory records with each transaction.
3. Popular inventory valuation methods include FIFO, LIFO, weighted average, and specific identification, each treating the cost of goods sold differently and thereby impacting reported income.
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VALUATION OF
INVENTORY Meaning of • The terms ‘inventory’ or ‘merchandise’ or ‘stock-in- trade’ means a complete list of goods that a business has
Inventory for sale at a given time. But in accounting, the inventory
includes even those goods that are in various stages of production, i.e, work-in-progress or work-in-process. • According to Accounting Standard(AS-2, revised), issued by ICAI, Inventories are assets : (a) held for sale in the ordinary case of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. • Inventories include goods purchased and held for resale, for example, merchandise(goods) purchased by a retailer and held for resale, computer software held for resale or land and other property held for resale. Objectives of Inventory 1. Effect on Liquidity : Short term creditors Valuation are interested in the liquidity position of the business enterprise and the general test for liquidity is the aggregated amount of current assets in relation to current liabilities. The proper valuation of inventories which constitute a major proportion of current assets is essential so that this item of current asset is not overstated so as to misstate liquid position of the business. 2. Effect on Income Statement : The proper determination of income depends on the proper valuation of all assets – fixed and current. Since inventories are generally large and fluctuating in amount, the net income is influenced by the allocation of cost of fixed assets (i.e., depreciation accounting) and valuation method is used in determining the ending inventory.
3. Effect on Balance sheet : As inventory is generally the largest of the current
assets owned by a business entity, an error in the valuation of inventories may cause a misrepresentation of its financial position. • When ending inventory is overstated, net income Summary for the accounting period will be overstated.
• When beginning inventory is overstated, net
income for the accounting will be underrated.
• When ending inventory is underrated, net
income for the accounting period will be understated.
• When beginning inventory is understated, net
income for the accounting period will be overstated. Inventory I. Periodic Inventory System : This system requires a physical count of all the inventory items
Systems on hand at specific times. The calculation of ending
inventory on hand is done by taking an actual physical count (or measure or weight) at the end of an accounting period and then quantity on hand is multiplied by the cost per unit. The benefits of annual count are : a) Where the physical counting is done on the accounting date, all corrections made will ensure the accuracy of the inventory figure shown in all the accounts. b) It is less expensive than a continuous inventory system. II. Perpetual Inventory System : In contrast to the periodic system, the perpetual inventory item system requires continuous updating with each purchase or sale transaction. A separate account for each type of inventory is maintained in a card or sheet to record the purchase and sale of each inventory item throughout the year. It is relevant to state that the use of perpetual inventory method does not eliminate the need for a physical count and valuation. Methods of Inventory Valuation 1. 2. Specific Identification of Costs First-in, First-out (FIFO) 3. Last-in, First-out (LIFO) 4. Weighted Average Method 5. Highest-in, First-out (HIFO) ILLUSTRATION – 1 (FIFO : PERPETUAL INVENTORY SYSTEM)
From the following transactions calculate the cost of ending inventory and cost of goods sold by applying FIFO under perpetual and periodic inventory systems respectively :
Date Transactions Units Price Per Unit
January 1 Opening Balance 1,000 20 brought forward February 10 Purchases 500 25 March 13 Purchases 400 22 March 20 Sold 1,200 … April 6 Sold 500 … May 12 Purchases 400 25 June 30 Sold 500 … THANK YOU
