ACCOUNTING STANDARD:2

VALUATIONS OF INVENTORIES

WHY WE NEED TO VALUE INVENTORIES

Major determinant of net income Asset on the Balance Sheet of companies Direct impact on the financial statements of the company

INVENTORY COST
Called capitalized inventory cost

Comprises all cost of: Purchase Cost of conversion Cost in bringing inventory to present location and condition
Except:

Abnormal costs incurred. Storage costs Administrative overheads Selling cost

DECLINE IN INVENTORY VALUE

Inventories are measured at the lower of cost and Net Realizable Value Net Realizable Value: Estimated selling price less Estimated cost necessary to make the sale If value of inventory declines below the cost carried on the BS(historical cost) then we record write down (loss) Reversal is required for a subsequent increase in the value of inventory written down. This is limited to the amount of original write down.

INVENTORY ACCOUNTING METHODS

 AS 2 allows for 3 methods 1. FIFO (First In First Out) 2. Weighted Average 3. Specific Identification FIFO and Weighted Average (LIFO under GAAP) are cost flow assumptions whereas Specific identification is not. Business must use the same cost formula for all inventories having similar nature and use. For different types of inventories, different methods can be used.

Total Units Sold: SP\Unit Revenue

20 695 13900

Units 1-Feb 5-Feb

Cost\unit 12 370 20 375

Weighted Average Method: Average Cost Total Cost Gross Margin 373.125 7462.5 6437.5

FIFO

Total Cost Gross Margin

7440 6460

DISCLOSURES
In financial statements Other information

y y

Particulars

AS-2

IAS-2

US GAAP

Measurement of WIP and Finished Goods

Accounted at Cost or Net Realiseable value, whichever is lower Includes costs of purchases, conversion and other cost to bring it to the current location and condition Use FIFO or Weighted Average

Same as AS-2

Accounted at Cost

Cost of Inventories

Same as AS-2

Same as AS-2

Cost Formulas

Same as AS-2

Use LIFO, FIFO or Weighted Average

WINDOW DRESSING
Meaning Titan case

TRADING ACCOUNT
Particulars FIFO Amt. Rs. WA Amt. Rs. Particulars FIFO Amt. Rs. WA Amt. Rs.

To, To, To, To,

Opening Stock Purchases Direct Wages Freight Expenses

4,800 2,200 400 200

4,800 2,200 400 200

By Sales By Closing Stock

6,000 2,250

6,000 1,800

To, Gross Profit c/f

650

200

8,250

7,800

8,250

7,800

PROFIT AND LOSS ACCOUNT

Particulars FIFO Amt. Rs. 500 50 100 WA Amt. Rs. 500 50 100 Particulars FIFO Amt. Rs. 650 700 WA Amt. Rs. 200 700

To, Salary To, Postage&Stamps To, Audit Fees

By Gross Profit b/f By Interest Received

To, Net Profit

700

250

1,350

900

1,350

900

BALANCE SHEET
Liabilities FIFO Amt. Rs. 14,100 700 800 1,200 500 300 WA Amt. Rs. 14,100 250 800 1,200 500 300 Assets FIFO Amt. Rs. 7,200 950 4,300 2,250 700 1,500 700 WA Amt. Rs. 7,200 950 4,300 1,800 700 1,500 700

Capital (+) Net Profit O/S salaries Bills Payable Bank Loan Creditors

Land & Building Investment Plant Stock Debtors Cash at bank Cash in hand

17,600

17,150

17,600

17,150