Rohit Agarwal 9883248954

Chapter 2: Valuation of Stock

ƒ Format of Bin Card:
Bin Card
Bin No. : Location: Maximum Level:
Description: Minimum Level:
Code: Orderings Level:
Stores Ledger Folio: Reorder Quantity:
Receipt Issue Balance Physical
Date GRN No. Qty. MRN No. Qty. Quantity Verification

ƒ Format of Stores Ledger:

ABC Ltd
Stores Ledger ( _ _ _ _ Method )
Receipts Issues Balance
Date GRN Qty Value SRN Qty Value Qty Value Remarks
Rate Rate Rate
No. (Unit) (Rs.) No. (Unit) (Rs.) (Unit) (Rs.)

ƒ Surplus of materials will appear in the receipts column.

ƒ Shortage of materials will appear in the issues column.
ƒ Returns from department to Stores will appear in the receipts column @ original issue.
ƒ Returns from Stores to suppliers will appear in the issues column @ original purchase.
ƒ Materials received as replacement from suppliers will be considered fresh receipts.
ƒ Transfer of Material from one department to other department is to be ignored.
ƒ Valuation of Inventory

FIFO LIFO

Periodic Perpetual Periodic Perpetual

ƒ Periodic:
Step 1: Calculation of units of Closing Stock
Particulars Units
Opening Stock XXX
Add: Purchases ( XX + XX + XX……) XXX
XXX
Less: Issues ( XX + XX + XX……) XXX
Closing Stock XXX
Step 2: Apply principle of FIFO/ LIFO to determine the value of closing Stock.
ƒ Perpetual:
Statement showing Valuation of Inventory
Date Particulars Rate
Rs. 10 Rs. 11 Rs. 12 Rs. 13 Rs. 14
Opening Stock XX
Add: Purchases XX
Less: Issue _______________________________________
Closing stock _______________________________________
Value
10 rohit.agarwal@icai.org

Normal & Crash Courses for ISC, CBSE, BCom, BBA, CA & CS
 Rohit Agarwal 9883248954

¾ Concept of Stock & Stores: Stock means all goods owned and held for sale in the ordinary course of
business or raw materials held for conversion into finished goods. Stores mean materials held by a concern
for the purpose of consumption in the business and not for resale.

¾ Objectives of Stock Valuation:

1. To ascertain the correct profit or loss made by the enterprise.
2. To disclose the true financial position of the enterprise.
3. To ascertain accurately the working capital position of the enterprise.

¾ Methods:
1. First-in-First out Method 3. Simple Average Cost
2. Last-in-First out method 4. Weighted Average Cost

¾ First-in-First out Method : This method is based on the assumption that the first item purchased is the
first item sold, that is all inventories are sold in the order in which they are purchased. Thus the cost of
materials issued represents the cost of earlier purchases and cost of closing stock represent the cost of latest
purchases.
¾ The advantages of FIFO are:
1. Stocks are valued strictly on cost.
2. In the case of falling prices, lower profits are reported, thus IT liability is reduced.
¾ The disadvantages of FIFO are:
1. The costs assigned to inventories may not reflect the current prices.
2. In the case of rising prices, higher profits are reported, thus IT liability is increased.

¾ Last-in-First out method: This method is based on the assumption that the recent item purchased is the
first item sold. Thus the cost of materials issued represents the cost of latest purchases and cost of closing
stock represent the cost of earlier purchases.
¾ The advantages of LIFO are:
1. In the case of rising prices, lower profits are reported, thus IT liability is reduced.
2. Stocks are valued strictly on cost.
¾ The disadvantages of LIFO are:
1. In the case of falling prices, higher profits are reported, thus IT liability is increased.
2. The costs assigned to inventories may not reflect the current prices.

¾ Differences: Take points from above (Assumption, Rising Prices, Falling Prices, Cost of materials issued
and Cost of closing stock.)

Periodic Inventory System Perpetual Inventory System

Explanation
Inventory is ascertained on the basis of Inventory is ascertained on the basis of records,
physical stock taking, done at periodic which are kept continuously up to date.
intervals.
Advantages & Disadvantages
Stock Balances are not readily available. Stock Balances are readily available.
It requires closing down of work for stock It does not require closing down of work for
taking. stock taking.
It is simple and inexpensive. It is elaborate and expensive.
This is suitable where the business is small. This is not suitable, if the business is small.
Note: While FIFO Periodic & FIFO Perpetual gives the same value, LIFO Periodic & LIFO Perpetual gives
the different values. So, if question is silent about the choice of method, then for FIFO Periodic is
recommended and for LIFO Perpetual is recommended.

Basis Bin Card Stores Ledger

What it records? BC is a record of only the quantity SL is a record of both the quantity
of material received, issued and in and value of material received,
hand. issued and in hand.
rohit.agarwal@icai.org 11
Rohit Agarwal 9883248954
Who maintains? BC is maintained by store keeper.
When posted? Posting is done at the time of
receipt or issue of materials.
Basis of Posting? Actual quantities of materials
received and issued.
Where kept? It is kept in the stores department.
SL is maintained by cost department.
Posting is done periodically after the
receipt or issue of materials.
Goods Received Note & Material
Requisition Note
It is kept outside the store in the cost
department.

¾ Material / Goods Received Note: GRN is prepared by the receiving section of the enterprise. It prepares
the GRN after verifying the goods received are in accordance with the purchase order (i.e. quantity and
rate) and quality report has been received approving the goods.

¾ Stores Requisition Note: When a department requires material from the stores, it prepares a Stores
Requisition Note, which is an order on the store, for the material required. It is signed by the in charge of
the department and is authorization for the issue of specified quantity of material.

¾ Material Return Note: On completion of production work, the materials left unused are returned to
store along with a note called MRN. It is made in triplicate and signed by the store keeper who returns it.

¾ Material Transfer Note: When materials are transferred from one department or job to another within
the organisation, the transfers are made on the basis of MTN. It is made in triplicate and signed by the in
charge of transferee (receiving) department.

¾ Effect of Errors in Valuation of Inventory:

Type of Error Effect on Cost of Goods Sold Effect on Gross/Net Profit
An Understatement of
Overstated Understated
Closing Stock
An Overstatement of
Understated Overstated
Closing Stock
An Understatement of
Understated Overstated
Opening Stock
An Overstatement of
Overstated Understated
Opening Stock

Write answer of these questions in your copy:

1. Name any four methods of pricing issue of materials. [ISC 1994, 04]
2. Explain the FIFO method of stock valuation. [ISC 1995]
3. Explain the LIFO method of stock valuation. [ISC 1993, 06]
4. State the advantages and disadvantages of FIFO method. [ISC 2000]
5. Distinguish between FIFO & LIFO methods of stock valuation. [ISC 1993]
6. Distinguish between Periodic & Perpetual methods of stock valuation. [ISC 1993, 00]
7. What is Stores Ledger? [ISC 2006]
8. What is Material Return Note? [ISC 2005]
9. What is Goods Received Note? [ISC 2002]
10. What is Stores Requisition Note? [ISC 2003]
11. What is Material Transfer Note? [ISC 2008]
12. State the objectives of Stock Valuation. [ISC 1997, 03]
13. What is the difference between stock and stores? [ISC 2001]
14. What do you mean by Stock? [ISC 1999]
15. Distinguish between Historical cost method & Replacement Cost method of stock valuation.
[ISC 1998]

12 rohit.agarwal@icai.org

Normal & Crash Courses for ISC, CBSE, BCom, BBA, CA & CS