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Saturday, April 1, 2017

Accounting and Finance for Bankers: MODULE C: SPECIAL ACCOUNTS: Inventory Valuation

MEANING 
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According to Accounting Standard 2, inventories mean tangible property held:
a.         For sale
b.         For production
c.          For maintenance and consumption of machinery and spares.

These three types represent the three components of inventory and are usually referred to as
a.     Finished goods
b.     Work-in-process, and
c.      Raw materials and components.

VALUATION METHODS
There are a number of methods used in valuation of stock, these are
a.      First in first out (FIFO)
b.         Last in first out (LIFO)
c.          Average cost ( Add all Prices divide it with the number of prices)
d.         Base stock: This method is based on the assumption that a minimum quantity of inventory (base stock) must be held at all times in order to carry on business.
e.         Adjusting selling price:  This method is also called as "retail inventory method". This method id widely used in retail sector business. The cost of inventory is ascertained by reducing the estimated percentage of gross margin from the sales value of inventory. The calculation of the estimated gross margin of profit may be made for individual items or department, as may be appropriate to circumstances.

COST OS INVENTORY= Sales – Gross Profit
Cost of Purchase= Cost of Goods Purchased – Trade Discount + Taxes + Packing and Transportation Cost.

METHODS OF TAKING INVENTORIES
a.      Periodic Inventory :"physically counting the stock at the end of the year and as on the accounting date"

b.      Perpetual Inventory: "Stock register is maintained which give the inventory balances at any time desired."

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