Financial Accounting II Lecture 12

Inventories

Example The three valuation methods are explained with the help of following data Receipts: 07 Jan 20--, 15 units @ Rs. 130 per unit 08 Jan 20--, 25 units @ Rs. 140 per unit 27 Jan 20--, 30 units @ Rs. 150 per unit Issues: 25 Jan 20--, 10 units 26 Jan 20--, 15 units 28 Jan 20--, 20 units

FIFO Date Receipts / Issues Value of Stock 07-01-20-- 15 @ Rs. 130 = 1950 1950 15 x 130 = 1950 1950 08-01-20-- 25 @ Rs. 140 = 3500 3500 15 x 130 = 1950 25 x 140 = 3500 5450 25-01-20-- 10 @ 130 =1300 1300 5 x 130 = 650 25 x 140 = 3500 4150 26-01-20-- 5 @ 130 = 650 10 @ 140 = 1400 2050 0 x 130 = 0 15 x 140 = 2100 2100 27-01-20-- 30 @ Rs. 150 = 4500 4500 15 x 140 = 2100 30 x 150 = 4500 6600 28-01-20-- 15 @ 140 = 2100 5 @ 150 = 750 2850 0 x 140 = 0 25 x 150 = 3750 3750 Note for graphics: Please follow the font colour pattern and alignment of figures

WEIGHTED AVERAGE Date Receipts / Issues Value of Stock Average Cost 07-01-20-- 15x130 1950.00 1950 / 15 130 08-01-20-- 25x140 3500.00 1950 + 3500 5450.00 5450 / 40 136.25 25-01-20-- 10x136.25 1362.50 5450 – 1362.5 4087.50 4087.5 / 30 26-01-20-- 15x136.25 2043.75 4087.5 – 2043.75 2043.75 / 15 27-01-20-- 30x150 4500.00 2043.75 + 4500 6543.75 6543.75 / 45 145.42 28-01-20-- 20x145.42 2908.4 6543.75 – 2908.4 3635.35 3635.35 / 25 145.41 Note for graphics: Please follow the font colour pattern and alignment of figures

LIFO Date Receipts / Issues Value of Stock 07-01-20-- 15 @ Rs. 130 = 1950 15 x 130 = 1950 1950 08-01-20-- 25 @ Rs. 140 = 3500 15 x 130 = 1950 25 x 140 = 3500 5450 25-01-20-- 10 @ 140 = 1400 15 x 140 = 2100 4050 26-01-20-- 15 @ 140 = 2100 0 x 140 = 0 1950 27-01-20-- 30 @ Rs. 150 = 4500 30 x 150 = 4500 6450 28-01-20-- 20 @ 150 = 3000 10 x 150 = 1500 3450 Note for graphics: Please follow the font colour pattern and alignment of figures

Effect of Valuation on Profit Assume selling price to be 250. The revenue would be 45 x 250 = 11,250

Effect of Valuation on Profit In case of FIFO Cost of Sale is 1,300 + 2,050 + 2,850 = 6,200 Therefore Gross Profit is 11,250 – 6,200 = 5,050

Effect of Valuation on Profit In case of Weighted Average Cost of Sales is 1,362.5 + 2,043.75 + 2,908.4 = 6,314.65 Therefore Gross Profit is 11,250 – 6,314.65 = 4,935.35

Effect of Valuation on Profit In case of LIFO Cost of Sales is 1,400 + 2,100 + 3,000 = 6,500 Therefore Gross Profit is 11,250 – 6,500 = 4,750

Comparison of Cost and NRV Suppose a company has a partially completed inventory item at the year end. Expected selling price of the item when completed is Rs. 2500. A further cost of Rs. 500 is required to complete the item Expected selling cost of the item is Rs. 100

Comparison of Cost and NRV What will be the carrying value of the inventory item if the cost incurred to date is: Rs. 1000 Rs. 1900 Rs. 2100

Comparison of Cost and NRV Net Realizable Value of the stock item: Selling price – Selling Exp – Completion costs 2500 – 100 – 500 = 1900

Comparison of Cost and NRV Compare this NRV with costs: 1900 vs 1000 – Cost is less than NRV therefore inventory will be shown at cost and no adjustment will be required. 1900 vs 1900 – Cost is equal to NRV therefore inventory will be shown at cost and no adjustment will be required. 1900 vs 2100 – Cost is greater than NRV therefore inventory will be shown at NRV.

Comparison of Cost and NRV Following adjustment will be required to bring stock to its NRV. Dr. Profit and Loss Account Rs. 200 Cr. Stock in Trade Rs. 200

Disclosures (Sample) Balance Sheet as at June 30, 20-2 (extracts) Notes 20-2 20-1 ASSETS Current Assets Inventories 3 xxx xxx Trade Debts Other Current Assets Cash and Bank

Disclosures (Sample) Profit and Loss Account for the Year Ended June 30, 20-2 (extracts) Notes 20-2 20-1 Revenue Cost of Goods Sold 9 xxx xxx Gross Profit

Disclosures (Sample) Notes to the Accounts for the Year Ended June 30, 20-2 Accounting Policies 2.1 Inventories Inventories are valued at lower of cost or net realizable value. Cost is calculated using the actual cost. Movements of inventory are recorded on the weighted average method / First in First Out method.

Disclosures (Sample) Notes to the Accounts for the Year Ended June 30, 20-2 Notes 20-2 20-1 3 Inventories Finished Goods xxx xxx Work in Process xxx xxx Raw Materials xxx xxx xxx xxx 3.1The company pledged Rs. xxx of inventories as a security for a non-current loan.

Disclosures (Sample) 9. Cost of Goods Sold Raw Material: O/S Raw Material + Purchases + Cost Incurred to Purchase RM - C/S Raw Material Cost of Material Consumed Conversion Cost: + Labour + Factory Overheads Total Factory Cost Work in Process + O/S of WIP - C/S of WIP Cost of Goods Manufactured Finished Goods + O/S of Finished Goods - C/S of Finished Goods Cost of Good Sold