Inventory
Meaning :
Held for sale in ordinary course of business.
Used as a material in production
Consumed in the production or maintenance -oil, Greece etc.
It also includes loose tools , supplies and spare parts.
Under construction project of builder is also a inventory.
Standby equipment of Fixed asset is also fixed asset.
At this level we will study valuation of inventory for trading concern and raw material of manufacturing concern.
Techniques of valuation of inventory
Historical methods:
Not interchangeable – specific identification method
Interchangeable –FIFO, LIFO, WEIGHTAGE ETC
Inventory will be valued at cost or NRV which is less.
NRV means net realizable value selling price –cost yet to be incurred.
Objectives of inventory valuation
Correct determination of income
Closing stock overstated – profit is increased
Under stated – profit decrease
Opening stock
Over stated – profit decrease
Under stated – profit increase
- true and fair financial position
It is part of current asset which will be shown in balance sheet.
- liquidity analysis
It is part of current ratio
- statutory compliance companies act and AS can be satisfied with correct valuation.
Cost of purchase includes purchase cost, non refundable duties and taxes, other expenses incurred for reaching up to godown, it excludes duty drawback, trade discount and rebate, storage, abnormal loss, administration cost and selling & distribution cost.
Cost of conversion – labour + overheads etc.
Inventory record systems
| Periodic inventory | Perpetual inventory |
| Physical verification | Book records
|
| Stock and cogs available on date | Continuous |
| COGS residue | Stock residue |
| Shortage treated as sales | Shortage treated in stock |
| Control not possible | Control is possible
|
| Simple and less expensive | Costlier |
| Closure of business | Business is continue |
Non historical cost methods
Adjusted selling price – it is used by retailers in which cost of individual item is not recorded. There are large no of items. In such type of business percentage of profit margin will be similar.
Trading account will be prepared, closing stock will be balancing figures.
Question :
Sales 350000, opening stock nil
Purchase 300000, closing stock at selling price 75000
find cost of closing stock.
question Sales 450000, opening stock = nil,
Purchase 400000, closing stock at selling price 50000. find cost of closing stock.
answer :
Gross profit :
If all goods are sold
Sales 450000+50000 = 500000
Purchase 400000, profit 100000
% of GP = 100000/500000
= 20%
Trading account
| Particulars | Rs. | Particulars | Rs. |
| To opening | Nil | By sales | 450000 |
| To purchase | 400000 | By closing | 40000 |
| To GP | 90000 | ||
| 490000 | 490000 |
Sales tax will be added after deducting trade discount but before packaging and transportation charges.
In practical life, it is not possible to count physical stock as on 31.03.
Hence it will be counted before or after 31.03.
While calculating book stock invoice date is relevant.
While calculating physical stock, actual delivery is relevant.
Goods received on consignment (as a agent) or on sale on return basis it can be included in physical but not in book.
Goods given on consignment (as a agent) or on sale on return basis it can be included in book but not in physical.
Question 25.3.2015 physical stock 100000, transactions between 25.03 to 31.03 as below.
Purchase 50000, goods received 40000.
Sales 75000, goods issued 70000
GP 20%.
Find closing stock as per book and physical.
Physical :
Physical on 25.03 100000
Purchase –received 40000
Cost of sales issued (56000)
70000*80%
Physical on 31.3 84000
book :
Physical on 25.03 100000
Purchase 50000
Cost of sales issued (60000)
75000*80% 90000
Question 10.04.2015 physical stock 100000, transactions between 01.04. to 10.04 as below.
Purchase 50000, goods received 40000.
Sales 75000, goods issued 70000
GP 20%.
Find closing stock on 31.03 as per book and physical.
Physical :
Physical on 10.04 100000
Purchase –received (40000)
Cost of sales issued 56000
70000*80%
Physical on 31.3 116000
book :
Physical on 10.04 100000
Purchase (50000)
Cost of sales issued 60000
75000*80%
Physical on 31.3 110000
Question 3 25.3.2015 physical stock 70000, transactions between 25.03 to 31.03 as below.
Purchase 30000, goods received 25000.
Sales 60000, goods issued 50000
GP 25% on cost
Find closing stock as per book and physical.
answer Physical :
Physical on 25.03 70000
Purchase –received 25000
Cost of sales issued (40000)
50000*100/125
Physical on 31.3 55000
book :
Physical on 25.03 70000
Purchase 30000
Cost of sales issued (48000)
60000*100/125
Physical on 31.3 52000
Question 4 10.4.2015 physical stock 70000, transactions between 1.4 to 10.04 as below.
Purchase 30000, goods received 25000.
Sales 60000, goods issued 50000
GP 25% on cost
Find closing stock as per book and physical.
answer Physical :
Physical on 10.04 70000
Purchase –received (25000)
Cost of sales issued 40000
50000*100/125
Physical on 31.3 85000
book :
Physical on 25.03 70000
Purchase (30000)
Cost of sales issued 48000
60000*100/125
Physical on 31.3 88000
While applying GP rate only normal sales will be considered.
Normal sales means such sales which is sold at predetermined price only.
If there is an abnormal sales i.e. sold at different price, cost of such sales and sale value realized will be excluded from trading account.
Question
Book stock as on 25.3 50000
Invoice received 22.3 Rs. 10000 but goods received on 27.03
Goods received on sale or return basis 23.03 Rs. 25000 but returned 29.03.
Goods given on consignment 24.03 35000 but returned on 28.03
Find physical stock as on 31.03
Answer :
Book stock includes/excluded on invoice basis.
But physical stock consider actual existence where it is lying.
In case 1 invoice is received before 25.03 hence included in given book stock, again it is received before 31.03 hence it is also part of physical stock.
In case 2 and 3 it is not considered in given book stock, as well as it is returned before 31st march hence no effect is required.
question 2
Book stock as on 25.3 50000
Invoice received 22.3 Rs. 10000 but goods received on 27.03
Goods received on sale or return basis 23.03 Rs. 25000 but returned 29.03.
Goods given on consignment 24.03 35000 but returned on 28.03
Find book stock as on 31.03
answer
there is no movement of invoice between 25.03 to 31.03. hence answer will be same.
Question 3
physical stock as on 25.3 50000
Invoice received 22.3 Rs. 10000 but goods received on 27.03
Goods received on sale or return basis 23.03 Rs. 25000 but returned 29.03.
Goods given on consignment 24.03 35000 but returned on 28.03
Find physical stock as on 31.03
Answer
physical stock as on 25.3 50000
goods received on 27.03 10000
return good sent on 29.03(25000)
goods returned on 28.03 35000
physical 70000
Question 4
physical stock as on 25.3 50000
Invoice received 22.3 Rs. 10000 but goods received on 27.03
Goods received on sale or return basis 23.03 Rs. 25000 but returned 29.03.
Goods given on consignment 24.03 35000 but returned on 28.03
Find book stock as on 31.03
Answer
physical stock as on 25.3 50000
goods received 27.03 10000
goods returned 29.03 (25000)
goods returned on 28.03 35000
book 70000