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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