Inventory Valuation Lecture Notes

Introduction

• Focus on inventory valuation, an important and scoring chapter.
• Exam questions can range from 5 to 10 marks.

Inventory Basics

• Definition: Inventory is the stock of goods held for sale.

• Types of inventory:

  • Trading Inventory: Goods purchased for resale.
  • Manufacturing Inventory: Includes raw materials, work in progress, and finished goods.

Trading Account & Gross Profit

• Gross profit is calculated as Sales minus Cost of Goods Sold (COGS).
• COGS includes all factory costs related to goods sold.

Inventory Valuation

• Importance of valuing inventory to determine profit.
• Methods of Valuation: Historical cost and Non-historical cost methods.

Historical Cost Methods

1. Specific Identification Method

   • Used for unique, non-interchangeable items.

2. FIFO (First-In, First-Out)

   • Assumes the oldest inventory is used first.
   • Calculate closing stock based on newest inventory.

3. LIFO (Last-In, First-Out)

   • Assumes the newest inventory is used first.
   • Calculate closing stock based on oldest inventory.

4. Simple Average Method

   • Calculate average of all purchase prices.

5. Weighted Average Method

   • Considers both price and quantity for averaging.

Non-Historical Cost Methods

• Adjusted Selling Price Method (Retail Inventory Method)
  • Used when individual item costs are unknown but selling price is known.
  • Calculate cost by subtracting profit percentage from selling price.

Calculation of Gross Profit Percentage

• Calculate the percentage of profit on sales to determine inventory cost.

Inventory Taking

• Inventory valuation can be adjusted based on market conditions.
• Discussed inventory taking and adjustment methods.

Illustrations and Examples

1. Illustration 8
   • Example of how to adjust and determine cost of goods sold and closing stock.
   • Consideration of normal and abnormal transactions affecting gross margin.

Conclusion

• Inventory valuation is crucial for accurate financial reporting and profit calculation.
• Understanding various methods and their applications is key for exams.