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Thursday, 24 December 2020

Meaning of inventory valuation


Inventory can be defined as assets held

For sale in the ordinary course of business or Processes of production for such sale or for conception in the production of goods or services for sale, including maintenance suppliers and examples other than machinery spares servicing humans and standby equipment. there can be different types of inventory based on the nature of business of an enterprise cost of the inventory is of a trading concern consists primarily of product purchase for resale in their existing form foot of it may also have an inventory of suppliers such a wrapping paper, cartoons stationary. The inventory of manufacturing concern consists of several types of investors inventory as raw material which will become part of goods to be produced work in process partially completed product in the factory and finished product. In manufacturing concern inventories will also include maintenance suppliers examples loose stools and spare parts cost of our inventory is do not include spare parts servicing equipment by a standard document which can be used only in connection with an item of fixed assets and whose use is expected to be a regular basis machinery spares are generally counted for a fixed asset for similarly in enterprise engage in construction business process projects under construction are also considered as inventory.

at the rear and every business and it needs to ascertain the closing balance of inventory which comprises of inventory of raw material work in progress finished good and other items. Value of closing inventory is put as a credit side of a trading account and asset side of the balance sheet. So before the provision of the final account accountant should know the value of the inventory of a business entity for stock however we shall restrict our discussion on inventory valuation of a manufacturing concern and goods of trading concern.
a primary issue in accounting for inventory is a determination of a value at which inventories are carried in the financial statement and until the related revenues and recognized schools of inventory is generally the most significant component of the current asset held by trading or manufacturing enterprise it is widely recognized that inventory is one of the major assets that affect the efficiency of operation. Both inventories and its shortage affect the production activity and the profitability of the enterprise whether it is manufacturing and trading business for stock valuation of inventory has a very significant bearing on the authenticity of the financial statements for the significance of inventory valuation arises due to various reasons as explained in the following points:
1) determination of income:
cost of goods sold is calculated as follows: Cost of goods sold = opening inventory + purchase + direct expenses - closing inventory for stock. inventory valuation will help a major impact on the income determination of merchandise cost is a large fraction of sales price list of the effect of any over or understatement of inventory may be explained as: 1) when closing inventory is overstated net income for the accounting period will be overstated. 2) when opening inventory is overstated common net income for the accounting period will be understated. 3)when closing inventory is the understated net income for the accounting period will be understated. 4) when opening inventory is the understated net income for the accounting period will be overstated. the effect of the statement of inventory figure on the net income is always through the cost of goods sold. Proper calculation of the cost of goods sold and for that matter, proper valuation of inventory is necessary for the determination of correct income. 2) ascertainment of financial position: inventory is are classified as a current asset. The value of inventory on the date of the balance sheet is required to determine the financial position of the business future of in case the inventory is not properly valued at the balance sheet will not disclose the truthful financial position of the business. 3) liquidity analysis: inventory is classified as a current asset it is one of the components of networking capital which reveals the liquidity position of a business first of ratio current ratio which study is the relationship between current assets and current liabilities is significantly affected by the value of inventory. 4) Statutory compliance: schedule III to the companies act 2013request valuation of each class of goods that is raw material work in progress and finished goods under board head to the disclosure of the financial statements. As the requirements of the accounting standards for the financial statements should disclose: 1)the accounting policies adopted in measuring inventory is including the cost formula used and 2)the total carrying amount of inventories and its classification appropriate to the enterprise. The common classification of inventory is a raw material work in progress finished goods Store in trade in respect of goods acquired for trading and spares and loose tools.

Basis of inventory valuation

Inventory should be generally valued at a lower cost or net realizable value. This principle is governed by the principal of conservative accounting under which any expenses or losses from transactions entered or event occurred or to be recognized immediately however any gains of profit a recognized until it becomes due or is actually realize full socks under this principle of lower of cost or net realizable value any loss due to decrease in the sales price of the inventory below it cost is recognized immediately as it is anticipated that the enterprise will close whenever it will sell. Cost of purchase: consists of the purchase price including duties and taxes other than those subsequently recoverable by the enterprise for the taxing authorities. write in words and other expenditure directly attributable to the execution for stock trade discounts and rebates duty drawbacks and other similar items are deducted in determining the cost of purchase. In other words, cost includes any amount paid to the reseller reduced by any discounts and rebates given by the seller. Similarity and duties paid to the similar will be part of the cost of the inventory unless the enterprises can recover these tax duties for the authorities. 2) another cost may include administrative overheads included to bring the inventory to present location and condition or any cost specifically in a cut on an inventory of a specific customer first of interest and other borrowing costs are generally not included in the cost of inventory. However, in some circumstances where the production process is long and it is required to carry inventory for a long period example wind rises and Timber, it is maybe appropriate to consider the interest and other borrowings cost also part of the cost of inventory. 3) net realizable value: this is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale in case of any sports and credit net realizable value will generally mean selling prices which reduces by selling and distribution expenses. In case of work in progress expenses in our heads required to be incurred to convert the value in progress into finished goods and making it ready for sale will also be reduced from selling price school trip in case of raw materials replacement cost is generally considered as net realizable values. an assessment is made of as at each balance sheet date. Inventories are usually written down to net realizable value on an item by item basis. In circumstances, it may be appropriate to group similar or related items example in the case of interchangeable items it may not be possible to identify the cost and not the realizable value of each item separately.