K. J.

SOMAIYA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH (SIMSR) ACADEMIC YEAR SEM -1

SUBJECT FINANCIAL ACCOUNTING SUBMITTED BY: NAME:- Hardik Sampat ROLL NO: 51 BATCH: MMM (2012-15) REFERENCE BOOK/ SOURCE: FINANCIAL ACCOUNTING, P.C TULSIAN

Methods of Valuation of Inventories:

The various methods for assigning the cost between sold and unsold goods are as below - First in First Out (FIFO) Method - Last in First out (LIFO) Method - Average cost method - Base stock method - Specific identification method - Standard cost - Adjusted selling price - Latest Purchase price - Next in First out (NIFO) - Highest in first out (HIFO)

First In First Out (FIFO)

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The first in first out method is based on the assumption that the goods which are received first after issued first. This assumption is made for the purposed of assigning cost and not for the purposes of the physical flow of goods The physical flow of goods therefore, need not necessarily coincide with the pattern of cost flow assumption The goods sold, therefore consist of the earliest lots and are value at the price paid for such lots. The ending inventory consists of the latest lots and is valued at the price for such lots. The ending inventory is stated in the balance sheet at a value nearer the current market price

Implications of FIFO Methods in case if Rising or Falling Prices

Periods Implications of FIFO method In the periods of Rising Higher income is reported since old Prices costs (which are lower than the current cost) are matched with the current revenues. As a result, income tax liability is increased In the Periods of Falling Prices Lower income is reported since old costs (which are higher than the current costs) are matched with current revenues. As a result, income tax liability is reduced

Advantages
1. This method conforms to the physical flow of goods 2. This value of closing stock tends to be nearer current market prices because it represents cost of current purchases 3. In the periods of falling prices, lower income is reported since old costs (which are higher than the current costs) are matched with current revenue. As a result, income tax liability is reduce 4. No unrealized inventory profits/losses are made by using this method because it is based on costs 5. This method is easy to operate if prices of materials do not fluctuate very frequently

Disadvantages
1. In a period of fluctuating prices, the cost of issue do not represents current market prices
2. In periods of rising prices, higher income is reported since old costs

(which are lower than the current costs) are matched with current revenues. As a result, income tax liability is increased 3. This method involves a lot of calculation work in case there are violent fluctuations in the prices of materials.
4. Comparison among similar jobs is very difficult if materials of different

batches carrying different prices are used in these jobs

Last In First Out (LIFO)

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The last in first out method is based on the assumptions that the goods which are received last are issued firs. This assumption is made for the purposes of assigning costs and not for the purposes of the physical flow of goods The physical flow of goods therefore, need not necessarily coincide with the pattern of cost flow assumptions . The goods sold, therefore consists of the latest lots and are valued at the price paid for such lots. The ending inventory consists of the earliest lots and is valued at the price paid for such lots. The ending inventory is understated in the balance sheet at old costs

Implications of LIFO methods in the periods of Rising or Falling prices:

Periods In periods of rising prices Implications of LIFO methods Lower income is reported since current costs (which are higher than the old costs) are matched with current revenues. As a result, income tax liability is reduced Higher income is reported since current costs (which are lower than the old costs) are matched with current revenues. As a result, income tax liability is increased

In periods of Falling prices

Advantages:
1. The cost of issues tend to be nearer the current market price because it represents costs of recent purchases 2. In periods of rising prices, lower income is reported since current costs (which are higher than the old costs) are matched with current revenue. As a result, income tax liability is reduced
3. No unrealized inventory profits/losses are made by using this method because it is based on cost

Disadvantages:
1. This methods does not conform to the physical flow of goods 2. The value of closing stocks does not tend to be nearer current market prices because it represents cost of earlier purchases

3. I n periods of falling prices, higher income is reported since current costs (which are lower than the old costs) are matched with current revenues. As a results, income tax liability is increased 4. This method involves a lot of Calculation work in case of there are violent fluctuations in the prices of materials 5. Comparison among similar jobs is very difficult if materials of different batches carrying different prices are used in these jobs

Weighted Average Price Method

The Weighted average price method is based on the assumption that each issue of goods consists of a due proportion of the earlier lots and is valued at the weighted average price Weighted average price is calculated by dividing the total cost of goods in stocks by the total quantity of goods in stocks This weighted average price is used for pricing all the issues until a new lot is received when a new weighted average price would be calculated. This method evens out the effect of widely varying prices of different lots which make up the stock

Advantages
1. It averages out the effect of price fluctuations 2. It can be advantageously used In process industries

Disadvantages
1. The closing stock does not correspond to the conventional accounting of valuation of stock 2. This method puts heavy burden on clerical staff because a new weighted average price is required to be calculated on the receipt of a new lot

3. This method cannot be used in job order industry where each

individual order must be priced at each stage upto completion

Equity Share Capital Meaning

An equity share is a share which is not preference share. In other words, it is a share which does not carry two preferential rightz (Viz. Rights to received dividend and right to receive payment of capital According to section 86(a) equity share capital may be (i) with voting rights or (ii) with differential rights as to voting, dividend or otherwise in accordance with such rules and subject to such conditions as may be prescribed

Preference Share Capital Meaning

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According to sec. 85, a preference share is one which carries the following two rights a. A right to receive dividend at a stipulated rate or of a fixed amount before any dividend is paid on equity shares b. A right to receive repayment of capital on winding up of the company, before the capital of equity shareholders is returend

Types of Preference Shares

1. Cumulative Preference Share is that share on which arrears of dividend accumulate. 2. Non- cumulative Preference share is that share on which arrears of dividend do not accumulate as per the express provision In the Articles of Assosiation 3. Participating Preference share is that share which in addition to two basic preferential rights, also carries one or more of the the following rights as per Articles:

i) A right to participate in the surplus profits left after paying dividend to equity shareholder at a stipulated rate. ii) A right to participate in the surplus assets left after the repayment of capital to equity shareholders on the winding up of the company

4.Non Participating Preference Share is that share which is not a participating share 5. Convertible Preference Share is that share which confers on its holder a right of conversion into equity share 6. Non convertible Preference share is that share which does not confer on its holder a right of conversion into equity share 7. Redeemable Preference share is that share which is redeemable in accordance with the provision of Sec. 80 & sec.80 A of the companies Act, 1956. After the commencement of the companies Act 1988, no company limited by shares can issue any preference share which is irredeemable.

Debenture
Debenture is written instrument acknowledging a debt and containing provisions as regards the repayment of principal and payment of interest at a fixed rate. According to Sec. 2(12) of the companies Act,1956, Debenture includes debentures, stocks, bonds and any other securities of a company whether constituting a charge on the assets of the company or not Debenture represents a debt.

Characteristics of a Debenture
It is an acknowledgement of indebtedness by the company to its holder for the amount stated in it. It is issued under the common seal of the company It provides for a fixed rate of interest It provides for repayment of principal sum at the fixed date or dates except in case of perpetual (or irredeemable) debenture

 It may or may not be secured It is expressed to be one of a series of like debentures except where single debenture is issued to one person