inventory valuation faa

7/29/2019 Inventory Valuation Faa

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JAWAHARLALNEHRU

TECHNOLOGI

CAL

UNIVERSITY

SCHOOL OF MANAGEMENT OFSTUDIES

Sub :financial accounting and analysis

Inventory valuation

K s s veena

12021E0043


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UNIVERSITY

Click to edit Master subtitle style

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INVENTORY VALUATION

Introductioninventory(closing stock) is the property of the

firm. Generally, inventory is the largest item of

the current assets held by a trading ormanufacturing business unit.


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Meaning

The term inventory means, ASSETS

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 consumedin the production process or in the rendering ofservices.

Inventory includes

finished goods(saleable)

work in progress(semi finished)

materials and supplies(raw material),


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Types of inventories

Inventories

Manufacturing concerns

tradingconcerns

Rammaterial

s

Work inprogress

Finishedgoods'

Finishedgoods


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Importance of inventoryvaluation

Determination of income

Determination of current profit

Disclosing true financial position

Financial analysis

Basis of inventory valuationInventories are recognized as permatching concept inventories are valuedat cost or net realized value which everis less as per conservatism concept


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Inventory valuation techniques

Inventory ,not ordinarilyinterchangeable

Inventory, ordinarily interchangeable

Specific identificationmethod

Historical

costmethods

Non-

historicalcost

methodsFLFO LIFO Averag

e price

Basestock

Weighted avg

price

Standard cost Adjusted sellingprice

Latestpurchase

price


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specific identification method

Under this method, each cost incurred to bring inventory to its

present location and condition is identified separately and takencost of that inventory

Historical cost methods

FIFO(first in first out) method

This method assumes that the item received firstare issued first so that the latest item are instock

In this method, an issue is valued at the oldestrate , while the closing stock is valued at thelatest 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 sothat the earlier items are in stock.

SIMPLE AVERAGE PRICE

In this method all the different prices are addedtogether and then divided by the number of prices .

sum of the prices of different items instock

Simple average price = number of prices


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WEIGHTED AVERAGE PRICE

cost of goods available for sale during the period isaggregated and then divided by number of unitsavailable for sale during the period, to calculateweighted 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 reducingappropriate percentage of gross margin from the sales

value of the inventoryValue of inventory= selling price of inventory -gross profit


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inventory valuation faa

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