Lecture Notes: Inventory Valuation Methods

Introduction

• Lecture Start: Introduction and greetings.
• Chapter to be Covered: Inventory Valuation.
• Importance: A scoring chapter, often asked for 5 to 10 marks in exams.

Basics of Inventory

• Definition: Inventory refers to the stock of goods available for sale.
• Types of Inventory:
  • Stock in Trade: Purchased finished goods for resale.
  • Manufacturing Inventory: Includes raw materials, work in progress, and finished goods.

Trading Account

• Purpose: To determine Gross Profit (Sales - Cost of Goods Sold (COGS)).
• Components of COGS: Direct costs associated with manufacturing, e.g., factory costs.

Inventory Valuation

• Purpose: To determine the value of closing stock for profit calculation.
• Methods:
  • Cost Method: Evaluate inventory value at cost.
  • Net Realizable Value (NRV): Estimated selling price minus costs of completion and disposal.
  • Prudence Concept: Record anticipated losses immediately, but gains after realization.

Historical Cost Methods

1. Specific Identification Method:

   • Used for unique items like luxury vehicles.
   • Example: Identify and value each item separately.
   • Exam Tip: Compare item by item, not total.

2. First In, First Out (FIFO):

   • Assumes earliest purchased items are sold first.
   • Example: Calculate closing stock based on unsold latest purchases.

3. Last In, First Out (LIFO):

   • Assumes latest purchased items are sold first.
   • Example: Calculate closing stock based on unsold earliest purchases.

4. Simple Average Method:

   • Calculate average of purchase prices.
   • Example: Calculate closing stock using average price.

5. Weighted Average Method:

   • Considers quantities in average price calculation.
   • Example: Calculate average price using total cost and total units.

Non-Historical Cost Method

• Adjusted Selling Price Method (Retail Inventory Method):
  • Used when item-by-item cost is hard to determine.
  • Process:
    • Calculate total cost of goods available for sale.
    • Determine total selling price of goods available.
    • Calculate gross profit percentage on sales.
    • Adjust selling price of closing stock to cost.

Important Problems and Examples

• Example 1: Cost of Goods Available for Sale calculation.
• Example 2: Normal and Abnormal Sales Transactions.
  • Normal Sales: Profits at regular percentage.
  • Abnormal Sales: Unusual profit margins.

Closing

• Next Lecture Preview: Inventory Taking.
• Note: Future lectures may be moved to a different platform for better engagement.

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These notes summarize the key points and methodologies discussed in the lecture on inventory valuation. The focus was on understanding various methods and applying them to calculate closing stock values for financial statements.