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Accounting Standards
2
Valuation Of Inventories
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Objective of Accounting
Standards The basic objective of accounting standards is to
remove variations in the treatment of severalaccounting aspects and to bring about
standardization in presentation
The ACCOUNTING STANDARDS BOARD(ASB) which functions under ICAI issuesaccounting standards
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OBJECTIVE
valuation of inventories
Formulate the method of computation of cost ofinventories/stock.
Determining the value of closing stock at which it is to beshown in balance sheet till it is not sold and recognized asrevenue.
Situation in which carrying cost of inventories is writtenbelow cost
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Applications
This Standard should be applied in accounting for inventories otherthan:(a)work in progress arising under construction contracts, including directly related
service contracts
(b)work in progress arising in the ordinary course of business of service providers;
(c)shares, debentures and other financial instruments held as sk in trade; and
(d)producers' inventories of livestock, agricultural and forest products, and mineral
oils, ores and gases to the extent that they are measured at net realisable value inaccordance with well established practices in those industries.
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DEFINITION
Inventories are assets: Held for the sale in the ordinary course of business
(Finished Goods).
In the process of production of such sale (Raw material andworking progress).
In the form of materials and supplies to be consumed in theproduction process or in the rendering of services (Stores,Spares, Raw material).
Inventories do not include machinery.
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Measure Of Inventories
MAJOR POINTS FOR VALUATION OFINVENTORIES Determination of cost of Inventories
Determination of net realizable value of inventories
Comparison between the cost and net realizable value
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Determination of Cost of
InventoriesCost of Inventories Includes:
Cost of Purchase Cost of Conversion
Other Costs (incurred in bringing the inventories to their present
location and condition)
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Cost Of Purchase
Purchase Price
Duty
Taxes
Freight Inward Other Expenditure directly attributable to the acquisition.
Duties and taxes recoverable by enterprises from taxing authorities
Trade discount CENVAT
VAT
Duty Drawback
Rebate
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Cost Of Conversion
It Consists of
the cost directly related to the units of production(DirectLabor, Direct Material, Direct Expenses)
Systematic allocation of fixed and variable productionoverheads that are incurred in converting material into finishedgoods.
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Other Costs
Cost incurred in bringing the inventories to theirpresent location and condition
Excise duty contributes directly to bringing the inventories toits present location and condition
Excise duties is direct costs, which should be included in the
valuation of inventories
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Determination of net
realizable value of Inventories.
Net realizable value means estimated selling price in ordinary course ofbusiness estimated costs of completion and estimated costs necessaryto make the sale
If the finished product is sold at cost or above cost, then the estimatedrealizable value of raw material and supplies is considered more than itscost
If the finished product is sold below cost, then the estimated realizablevalue of raw material or supplies is equal to replacement price of rawmaterial or supplies
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Comparison between the cost
and net realizable value
The comparison between the cost and net realizable value
should be made by grouping the items.
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Methods of computing
Inventories
First-in, First-out (FIFO)
Last-in, First-out (LIFO) Weighted-average cost (WAC)
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First-in, First-out (FIFO)
This method assumes that the first unit acquired are thefirst unit sold
The costs of ending inventories is that of the most recent
purchases A major criticism of FIFO: Improper matching of cost
with revenues since the cost of goods sold is computed onthe bases of old price that are possibly unrealistic
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FIFO METHOD
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Last-in, First-out(LIFO)
This method assumes that the last unit acquired are thefirst unit sold
The cost of the units in the ending inventory is that of theearliest purchases
The chief advantage of LIFO is that balance sheet valueof inventories may be outdated and unrealistic
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LIFO METHOD
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Weighted average Cost
(WAC) This method assumes that the goods available for
the sale are homogeneous
The average cost is computed by dividing the costof goods available for sale by the number of theunits available by sale
The major criticism of WAC is that it assigns nomore importance to current prices than to pastprices paid several months ago
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WAC METHOD
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Disclosure in financialstatements
Accounting policy adopted in measuringinventories
Cost formula used
Classification of inventories like Finished Goods,WIP, Raw Materials, Spare Parts.
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Presented By
GROUP NO: 2Wesley VargheseAkhil John
Vinayak ShenoyMukul PooniaAbhishek VyasSandeep Kumar .N.R
Sukesh PoojariSuprit Nayak
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THANK YOU