1. Financial Accounting II Lecture 12

2. Inventories

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

4. FIFO Date Receipts / Issues Value of Stock 07-01-20--
Rs. 130 =
15 x 130 =
Rs. 140 =
15 x 130 = 1950
25 x 140 =
130 =
5 x 130 = 650
25 x 140 =
= 650
140 =
0 x 130 =
15 x 140 =
Rs. 150 =
15 x 140 = 2100
30 x 150 =
140 = 2100 =
0 x 140 =
25 x 150 =
Note for graphics: Please follow the font colour pattern and alignment of figures

5. WEIGHTED AVERAGE Date Receipts / Issues Value of Stock Average Cost
15x130
1950 / 15
130
25x140
5450 / 40
136.25
10x136.25
5450 –
/ 30
15x136.25 –
/ 15
30x150
/ 45
145.42
20x145.42
2908.4 –
/ 25
145.41
Note for graphics: Please follow the font colour pattern and alignment of figures

6. LIFO Date Receipts / Issues Value of Stock 07-01-20--
Rs. 130 =
15 x 130 =
Rs. 140 =
15 x 130 = 1950
25 x 140 =
140 =
15 x 140 =
140 =
0 x 140 =
Rs. 150 =
30 x 150 =
150 =
10 x 150 =
Note for graphics: Please follow the font colour pattern and alignment of figures

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

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

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

10. Effect of Valuation on Profit
In case of LIFO Cost of Sales is
1, , ,000 = 6,500
Therefore Gross Profit is
11,250 – 6,500 = 4,750

11. 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
A further cost of Rs. 500 is required to complete the item
Expected selling cost of the item is Rs. 100

12. 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

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

14. 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.

15. 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

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

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

18. 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.

19. Disclosures (Sample)
Notes to the Accounts for the Year Ended June 30, 20-2
Notes
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.

20. 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