Isc Accounts Stock Valuation

Rohit Agarwal 9883248954

Chapter 2: Valuation of Stock ƒ

Format of Bin Card: Bin Card Bin No. : Description: Code: Stores Ledger Folio:

Receipt GRN No. Qty.

Date

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Location:

Issue MRN No.

Maximum Level: Minimum Level: Orderings Level: Reorder Quantity: Balance Physical Quantity Verification

Qty.

Format of Stores Ledger: ABC Ltd Stores Ledger ( _ _ _ _ Method ) Date

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GRN No.

Receipts Qty Rate (Unit)

Value (Rs.)

SRN No.

Issues Qty Rate (Unit)

Balance Value (Rs.)

Qty (Unit)

Rate

Value (Rs.)

Remarks

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

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Valuation of Inventory FIFO Periodic

LIFO Perpetual

ƒ Periodic: Step 1:

Periodic

Calculation of units of Closing Stock Particulars Opening Stock Add: Purchases ( XX + XX + XX……) Less: Issues ( XX + XX + XX……) Closing Stock

Perpetual

Units XXX XXX XXX XXX XXX

Step 2: Apply principle of FIFO/ LIFO to determine the value of closing Stock. ƒ

Perpetual:

Statement showing Valuation of Inventory Date

Particulars Opening Stock Add: Purchases Less: Issue Closing stock Value

10

Rs. 10 XX

Rs. 11

Rate Rs. 12

Rs. 13

Rs. 14

XX _______________________________________ _______________________________________

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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 2. Last-in-First out method

3. Simple Average Cost 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 records, which are kept continuously up to date.

Inventory is ascertained on the basis of physical stock taking, done at periodic 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 What it records?

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Bin Card Stores Ledger 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.

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Rohit Agarwal 9883248954 Who maintains? When posted? Basis of Posting? Where kept?

BC is maintained by store keeper. Posting is done at the time of receipt or issue of materials. Actual quantities of materials received and issued. 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 An Understatement of Overstated Closing Stock An Overstatement of Understated Closing Stock An Understatement of Understated Opening Stock An Overstatement of Overstated Opening Stock

Effect on Gross/Net Profit Understated Overstated Overstated Understated

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]

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