Inventory valuation

• Their valuation and proper recording is important task. It is a method of calculating Ending Inventory cost. It takes Cost of Goods Available for Sale and divides it by the total amount of goods from Beginning Inventory and Purchases. This gives a Weighted Average Cost per Unit. A physical count is then performed on the ending inventory to determine the amount of goods left. Finally, this amount is multiplied by Weighted Average Cost per Unit to give an estimate of ending inventory cost.

Note that the asset account in inventory error analysis is ending inventory, and the equity effect is retained earnings, specifically the effect on net income. Other errors, particularly with purchases, may be more complicated to analyze. On 12/28, purchased inventory, FOB Destination. Shipped 12/28, did not arrive until Jan. 2. Up-to-date record in inventory account.– Cost of goods sold computed for each sale.

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Such a computation is referred to as stock reconciliation. Which is the Best method for inventory valuation ??? Under Income Tax law any method may be adopted but it should be followed consistently.

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Average Cost • FIFO (First-in First-out) under FIFO, the first units acquired are assumed to be first units sold.  Impact of NRV on valuation of inventory, COGS, GP and NP. Last-in, First-out • Assumes that the materials or goods received last in the stores are the first to be issued or sold. • Therefore the cost of the units in the ending inventory is that of the earliest purchases. Meaning of Inventory Inventory is tangible property to be consumed in production of goods or services or held for sale in the ordinary course of business.

• Principles and Norms  Valuation policy  AS 2 – inventories are valued at lower of actual cost and NRV.
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• We have brought you the graphic-rich Inventory Valuation PPT template to depict the value of goods unsold at the time of preparing financial statements.
• This accounting standard is applicable to all companies irrespective of their level .
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First-In, First-Out method can be applied in both the periodic inventory system and the perpetual inventory system. COST FORMULAS FIFO O First in first out It is assumed that the items of inventory purchased or produced first, are consumed or sold first. Thus the items remaining in inventory at end of the period would consists of the items most recently produced or consumed.

CHAPTER. INVENTORY VALUATION. Perpetual Updates inventory and cost of goods sold after every purchase and sales transaction Periodic Delays updating of inventory and cost of goods sold until end of the period Misstates inventory during the period. C. Cost of Conversion Cost of conversion includes all cost incurred during the production process to complete the raw materials into finished goods. Cost of conversion also includes a systematic allocation of fixed and variable overheads incurred by the enterprise during the production process. The methods of inventory valuation can be beautifully exhibited via a well-designed layout. Identification of old , non-moving and obsolete stock To ensure that stocks reflect assets having realisable value , old , non-moving and obsolete stocks should be identified and scrapped periodically and such loss must be recognised in the financial statements.

Of each period through physical count.– Requires AJE to transfer costs to EI and COGS. The inventory valuation technique is illustrated through a flowchart diagram. Periodic System • No stock register is maintained. • Valuation of closing inventory is done at the end of a particular period. • Entry of each and every receipt and issue is not maintained on ongoing basis. Financial Accounting Accounting for Inventory Chapter Six Methods of Inventory Costing There is one more method used called LIFO (Last-in First- out) Under the LIFO method last units acquired are assumed to be the first units sold.

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However, when it is difficult to calculate the inventory valuation ppt using above methods, Standard cost and Retail cost can be used if the results approximate the actual cost. Students can find the best tutors and instructors through LearnPick’s online tutoring marketplace. We neither supply nor recommend tutors to those in search of such services, and vice-versa. LearnPick does not verify the identity or authenticity of information posted by tutors or students. You can learn more about verifying the identity of other users in our Safety Center. Disclosure requirements  The accounting policies adopted in measuring and valuing inventories  The cost formula used in valuation  Total carrying amount of inventories and its classification appropriate to the enterprise.

   It requires a detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year end inventory. When this information is found, the amount of goods are multiplied by their purchase cost at their purchase date, to get a number for the ending inventory cost. In theory, this method is the best method, since it relates the ending inventory goods directly to the specific price they were bought for. However, this method allows management to easily manipulate ending inventory cost, since they can choose to report that the cheaper goods were sold first, hence increasing ending inventory cost and lowering cost of goods sold. This will increase the income.

Instead of crediting Purchase Discounts, the company credits Inventory. At the end of 2014, Raider calculated its ending inventory to be $1,900, based on the FIFO technique. Because of the carryover nature of inventory, some inventory errors reverse out by the end of the second year involved.

Therefore, inventory cost under LIFO method will be the cost of earliest purchases. Using the LIFO method to evaluate and manage inventory can be tax advantageous, but it may also increase tax liability.      Perpetual inventory system is costly to maintain but it has numerous advantages which are as follows It obviates the need for stock taking by actual counting at the end of financial period. There is no sudden ‘out of stock’ situation. It does not need special staff to be employed for stock taking. Controlling losses is easier under this method as inventory records continuosly indicate the goods that must be in hand.

Alternatively, management can choose to report lower income, to reduce the taxes they needed to pay. Using this method, it is very hard to relate shipping and storage costs to a specific inventory item. These numbers will need to be estimated, hence reducing the specific identification method’s benefit of being extremely specific.

PowerShow.com is brought to you byCrystalGraphics, the award-winning developer and market-leading publisher of rich-media enhancement products for presentations. Our product offerings include millions of PowerPoint templates, diagrams, animated 3D characters and more. When an product line or large segment is eliminated), then current income may increase significantly, as COGS absorbs much lower costs. Periodic or perpetual systems; calculations for perpetual are more cumbersome.

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Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. Principles and Norms  Valuation policy  AS 2 – inventories are valued at lower of actual cost and NRV.  NRV – estimated selling price less the aggregate of estimated costs of completion of inventory and estimated costs necessary to make the sale.  Estimates of NRV are based on the most reliable evidence available at the time of making the estimates.

The deck is infused with vector-based infographics, self-explanatory icons, and stunning color combinations. You can use it to add meaning to your presentations and enhance the overall engagement and comprehension. Financial Accounting Accounting for Inventory Chapter Six Methods of Inventory Costing FIFO (First-in First-out) advantages – ► Reports current cost for Ending Inventory ► Reports higher Net Income.

Perpetual Inventory system Unlike periodic inventory system where inventory is determined at the end of the accounting period, perpetual inventory system refers to continuous valuation of inventories. Here a continuous record of all purchases and sales is maintained . Today since it is relatively easy to record huge number of transactions electronically , most of the companies have perpetual inventory system.

 Are valued at cost per unit.  After this valuation, abnormal losses are transferred to Profit & Loss Account. CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner.

This accounting standard is applicable to all companies irrespective of their level . This standard prescribes the accounting treatment for inventories and sets the guidelines to determine the value at which the inventories are carried in the financial statements. Principles and Norms – Allocation of OHs – allocated to conversion costs on the basis of normal capacity of production facilities – Joint and by-products – allocated between the products on a rational and consistent basis. – If immaterial, waste / scrap / by-product – valued at NRV and deducted from the cost of the main product. Drawback • Elaborate system – more expensive.

It also facilitates the calculation of the cash flow savings from reduced taxes. This number may be used to convert LIFO Inventory and COGS and Net Income to a FIFO basis, to allow for comparison to other companies. The SEC now requires that any income increases from LIFO layer liquidation now be disclosed separately in the financials.

Business experts and finance managers can leverage this power-packed set to describe how stock valuation helps companies assess the inventory turnover ratio and plan future purchasing decisions. You can also illustrate how to choose the right inventory valuation method that best fits your business. The visuals can also be used to complement the text concerning challenges of inventory valuation. Financial Accounting Accounting for Inventory Chapter Six Methods of Inventory Costing GAAP provide for a number of acceptable inventory costing methods including – Specific Identification. • Average Cost – Here the value of inventory is taken on average cost. All costs incurred in respect of stock in inventory are added up and then divided by the number of units in stock.

AS 2 requires the inventory value of goods which cannot be segregated for specific projects should be assigned using FIFO or WAC whereas IAS requires the same formula to be used for all the inventories with similar nature. Fixed overheads are those indirect costs which are incurred by the enterprise irrespective of production volume. These are the cost that remains relatively constant regardless of the volume of production, such as depreciation, building maintenance cost, administration cost etc. Other costs which are incurred in bringing the inventories to their present location and condition. Each year the new layers are compared to old layers , and inventory change is calculated. See Handout for example.

COST FORMULAS WAC O Weighted average cost It assumes the cost of inventory as the weighted average of cost of similar items in the beginning of the period and cost of similar items produced/ purchased during the period. Either any one method or different methods for O different types of inventories. The revised Accounting standard does not O recognize LIFO method. It is one of the methods commonly used to calculate the value of inventory on hand at the end of an accounting period and the cost of goods sold during the period. This method assumes that inventory purchased or manufactured first is sold first and newer inventory remains unsold. Thus cost of older inventory is assigned to cost of goods sold and that of newer inventory is assigned to ending inventory.

• When a method is chosen, it is advisable to continue such method consistently from year to year. What is Inventory? • Inventory are the tangible property of a firm • Held for resale or to be consumed in the production of goods or services for sale. • Regular income is generated by selling of these inventories.

Whatever your area of interest, here you’ll be able to find and view presentations you’ll love and possibly download. And, best of all, it is completely free and easy to use. Most companies that use LIFO choose to use Dollar Value LIFO. In this technique, the different groups of inventories are turned into annual dollar layers. Cumbersome and very difficult to implement for any company with even a modest amount of inventory. External financial reporting, a financial statement disclosure is required that indicates the calculated inventory at FIFO. The difference between the FIFO and LIFO inventories is called the LIFO Reserve.