Financial Accounting

    • All manufacturing and trading organizations carry stocks or inventories in the form of
    • Raw Material Inventory
    • Work –in-process Inventory
    • Finished Goods Inventory
    • There are four major methods of inventory valuation.
      • Specific Identification: It requires the linkage of individual inventory items with the exact purchase costs of each unit. This method is largely confined to expensive individual merchandize.
      • First-in-first-out: The method assumes that the goods purchased first are sold first. That is, the goods issued or sold currently those which represent the earliest purchase amongst the goods held in inventory.
      • Last-in-First-Out (LIFO): This method assumes that the goods issued or sold out of the inventory are ones most recently purchased or manufactured. Therefore, the goods held in stock represent the earliest purchases or earliest units’ production.
      • Weighted Average Method: This method assumes that all inventories available are best represented by a weighted average cost. The average cost of goods held in inventory is recalculated every time a fresh purchase is made and goods issued or sold are priced at an average price till such time as the next lot is purchased.
    • There are two methods of maintaining records:
    1. Perpetual inventory system: A system of keeping continuous record of inventory and cost of goods sold on a day-to-day basis. However, physical inventory counts should be taken at least once a year to check on the accuracy of the clerical records.
    2. Periodic inventory system: Unlike a perpetual inventory system, the cost of goods sold and an updated inventory balance are computed only at the end of accounting period, or any other reporting period decided upon when a physical count of inventory s taken.

    According to Accounting Standard 2

    • Inventory means tangible assets held
    1. for sale in the ordinary course of business, or
    2. in the process of product ion for such sale, or
    3. for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery parts.
    • Inventories should be valued at lower of historical cost and net realization value.
    • Historical cost is a combination of cost of purchase, cost of conversion, and other costs incurred in the normal course of business in bringing the inventories up to their present location and condition.
    • The standard specifies that the historical cost of inventories should normally be determined by using FIFO, average cost or LIFO formulae.
    • The production overheads to be absorbed may be determined either according to the absorption method or according to variable costing method. Production overheads under the absorption costing method, the overhead rates should be calculated on the normal level of production.