1. Valuation of Inventories
 Importance of Inventories
 How much inventory to hold?
 Valuation of inventory
 Reporting

2. Valuation of Inventories
 AS – 2
 Meaning and significance of Inventories
 Scope and coverage
 Principles and norms of standard accounting treatment:
 Valuation policy
 Cost of inventories
 Cost formulas
 Techniques for the measurement of cost
 NRV
 Disclosure requirements

3. Meaning and significance
 Inventories are defined as assets held for
 Sale in the ordinary course of business
 In the process of production for such sale
 In the form of materials or supplies to be consumed in the
production process or in the rendering of services.
 Finished goods, WIP, materials, maintenance
supplies, consumables and loose tools.
 Machinery spares – AS 10

4. Scope and coverage
 AS 2 deals with all inventories except
 WIP arising under construction contracts, including
directly related service contracts (AS 7)
 WIP arising in the ordinary course of business of service
providers
 Shares, debentures and other financial instruments held
as stock-in-trade, and
 Producers’ inventories of livestock, agricultural and forest
products, and mineral oils, ores and gases to the extent
that they are valued at NRV in accordance with well
established practices in those inventories.

5. Principles and Norms
 Valuation policy
 AS 2 - inventories are valued at lower of actual
cost and NRV.
 NRV – estimated selling price less the aggregate
of estimated costs of completion of inventory and
estimated costs necessary to make the sale.
 Estimates of NRV are based on the most reliable
evidence available at the time of making the
estimates.

6. Principles and Norms
 Cost of Inventories – Costs of Purchase + Costs
of conversion + other costs incurred in bringing
the inventories to the present location and
condition.
 Cost of Purchase – final invoice value
+ carriage + duties and taxes – recoverable from the tax
authorities
- Cost of conversion – direct labor + fixed production
overheads + variable production overheads

7. Principles and Norms
- Allocation of OHs – allocated to conversion costs
on the basis of normal capacity of production
facilities
- Joint and by-products – allocated between the
products on a rational and consistent basis.
(relative sales value).
- If immaterial, waste / scrap / by-product – valued
at NRV and deducted from the cost of the main
product.

8. Principles and Norms
- Other costs – costs of designing products for
specific customers.
- Interest and other borrowing costs
- Exclusion of certain costs
- Abnormal amt of waste materials, labor or other
production costs
- Storage costs, unless necessary for the next stage of
production
- Administrative OH that do not contribute to bringing the
inventory to the present location and condition
- Selling and distribution costs

9. Principles and Norms
 Cost formulas – cost flow assumptions
 FIFO – assigns higher value
 LIFO – assigns lowest value, relief during inflation
 WAC – assigns lower value than FIFO
 Impact of the methods of valuation on COGS, GP
and NP
 FIFO – highest inventory value, highest GP and
NP

10. Principles and Norms
 Techniques for the measurement of cost
 Actual cost method
 Standard cost method
 Retail method

11. Principles and Norms
 Net Realisable Value – writing down
inventory below cost to NRV
 Circumstances justifying write-down to NRV
– selling price declined, damage, wholly or
partially obsolete, estimated cost have
increased.
 Basis of write-down – item by item basis or
similar or related groups basis

12. Principles and Norms
 Factors to be considered in estimating NRV
 Fluctuations of price
 Purpose for which the inventory is held
 Exception to write down – in case of decline in
prices of materials held for use in production, if
the finished products are expected to be sold at a
higher price.
 Impact of NRV on valuation of inventory, COGS,
GP and NP.

13. Disclosure requirements
 The accounting policies adopted in
measuring and valuing inventories
 The cost formula used in valuation
 Total carrying amount of inventories and its
classification appropriate to the enterprise.