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Q.1) what is inventory valuation?

ANSWER:
An inventory valuation allows a company to
provide a monetary value for items that make up
their inventory. Inventories are usually the largest
current asset of a business, and proper
measurement of them is necessary to assure
accurate financial statements. If inventory is not
properly measured, expenses and revenues cannot
be properly matched and a company could make
poor business decisions.
The inventory accounting involves two major
aspects:
• The cost of the purchased or manufactured
inventory has to be determined and
• Such cost is retained in the inventory accounts
of the company until the product is sold

Q.2) What are the method by which inventory can


be valued?
ANSWER: followings are the methods of
inventory valuation-

A.) COST PRICE METHOD:


1. first in first out
2. last in first out
3. average cost
4. inflated price
5. specific price
6. base stock
7. Highest in first out.
B.) MARKET PRICE METHOD:
1. Replacement method
2. Realizable value.
C.) STANDARD PRICE METHOD:
1. current standard price
2. Basic standard price.

Q.3) How to value inventory under FIFO method.


Bring out a Profarma for FIFO method?

ANSWER:
Under this method material is first issued from
the earliest consignment on hand & price at the
cost at which that consignment was placed in
stores.
The unit in opening stock of material is treated as,
if they are issued first, the unit from the first
purchase issued next, so on until the units left in
the closing stock of material are valued at the
latest cost of purchase. It follows that unit costs
are apportioned to cost of production according to
their chronological order of receipts in the store.
The method is most suitable in times of falling
prices because the issue price of materials to job
or works order will be high (material issued from
the earliest consignment which were purchased at
higher rate) while the cost of replacement will be
how. But in case of rising price this method is not
suitable because the issue price of material to
production will be low, while the cost of
replacement of material will be high.

PROFARMA OF FIFO METHOD


RECIPTS ISSUE BALANCE
DATE PARTICULAR
Qnty. Tota Unit Qnty. Total Unit Qnty. Total Unit
l cost cost cost cost cost
cost
Jan.1 Balance b/d
Requisition slip
no.
Goods received
notes

Q.4) How to value inventory under LIFO and bring out


the profarma of LIFO?
ANSWER:
Under this method are priced in the reverse
order of purchase i.e. the price of the latest
available consignment is taken. This method is
sometime known as replacement cost method
because material are issued at the current cost
to jobs or work order accept when purchased
were made long ago. This method is suitable in
time of issuing price because material will be
issued from the latest consignment at a price
which is closely related current price level.
Valuing material issued at the price of the
latest available consignment will help the
fixing the competitive selling price of the
product.

PROFARMA OF LIFO METHOD


RECIPTS ISSUE BALANCE
DATE PARTICULAR
Qnty. Total Unit Qnty. Total Unit Qnty. Total Unit
cost cost cost cost cost cost
Jan.1 Balance b/d
Requisition slip no.
Goods received
notes

Q.5) How to value inventory under HIFO method and bring out
profarma?
ANSWER:
This, method is based on the assumption that
closing stock of material should always remain
at the minimum value of the available
consignment in the store. This method is not
popular as it is always under value the stock
which amounts to mainly used in case of plus
contract or monopoly product as it is helpful
in increasing the price of the contract or
product.

PROFARMA OF HIFO METHOD


RECIPTS ISSUE BALANCE
DATE PARTICULAR
Qnty. Total Unit Qnty. Total Unit Qnty. Total Unit
cost cost cost cost cost cost
Jan.1 Balance b/d
Requisition slip no.
Goods received
notes

Q.6) How to value inventory


A. average cost method
B. weighed average cost method
ANSWER:
A. AVERAGE COST METHOD: the
principle on which the average cost method is
based that all of the materials in store are so
mixed update and issue account can not be
made from any particular lot of purchase and
therefore it is proper if the materials are
issued at the average cost of the material in
store. Average may be of two types.
 Simple average price- a price which is
calculated by dividing the total of the
price of the material and in the stock
from which the material to be priced
could e drawn by the no. of the prices
used in the total.
Simple average price is calculated by
dividing the total of unit purchase prices
of different lot in stock on the date of
issue by the no. of prices issued in the
calculation and quantity of different lot
is ignored. This method may be to over
recovery or under recovery of cost of
material from production because
quantity purchased in each lot is
ignored.
B. weighted average price- a price which is
calculated by dividing total cost of material
in the stock from which the material to be
priced could be drawn by the total quantity
of material in the stock.
In period of heavy fluctuation in the price of
material, the average cost method gives
better result. Because it tends to smooth out
fluctuation in price by taking the average of
prices of various lots in stock.