© Prentice-Hall of India Private Limited, All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

© Prentice-Hall of India Private Limited, All rights reserved.2 Inventories Chapter 7

© Prentice-Hall of India Private Limited, All rights reserved.3 Inventory Valuation and Income Measurement  Defining inventories  Goods meant for sale or for further processing  Types of inventories  Raw materials  Work in progress  Finished goods  Matching inventory costs with revenues  Effect of inventory errors Chapter 7

© Prentice-Hall of India Private Limited, All rights reserved.4 Determining the Physical Inventory  Importance of taking physical inventory  Procedure for taking inventory  Goods in transit  Shipping terms and passing of property  Goods on consignment Chapter 7

© Prentice-Hall of India Private Limited, All rights reserved.5 Pricing the Inventory  Cost basis  Inventoriable costs or product costs  Period costs  Inventory costing methods  Physical flow and cost flow  Specific identification  First-in, first-out  Last-in, first-out  Weighted-average cost Chapter 7

© Prentice-Hall of India Private Limited, All rights reserved.6 Pricing the Inventory continued  Comparison of alternative methods  Managerial motivations in selection  Other inventory cost methods  Standard cost  Base stock  Inventory profits  The lower-of-cost or market (LCM) rule  The conservatism principle and prudence  The consistency principle Chapter 7

© Prentice-Hall of India Private Limited, All rights reserved.7 Estimating Inventory Value  When is inventory value estimated  Methods of estimating inventory value  Retail inventory method  Retail to cost ratio  Assumptions  Gross profit method  Gross profit ratio  Assumptions Chapter 7

© Prentice-Hall of India Private Limited, All rights reserved.8 Perpetual Inventory System  What is the perpetual inventory system?  How is it different from the periodic inventory system?  Recording accounting entries  Maintaining perpetual inventory records  Internal control and perpetual inventory system Chapter 7

© Prentice-Hall of India Private Limited, All rights reserved.9 Accounting for Manufacturing Costs  Cost of goods manufactured  Raw materials consumed  Direct labour  Manufacturing overhead  Direct costing and absorption costing  Cost of goods sold Chapter 7

© Prentice-Hall of India Private Limited, All rights reserved.10 Reporting Inventories under the Companies Act  Companies (Auditor’s Report) Order 2003  Periodical physical verification of inventory  Adequacy of physical verification  Maintenance of proper records for inventories  Adequacy of internal control procedure Chapter 7

© Prentice-Hall of India Private Limited, All rights reserved.11 Financial Analysis of Inventories  Inventory turnover ratio  Interpreting the inventory turnover ratio in financial analysis Chapter 7