Introduction
The reference of stock in trade or simply stocks is a term given for inventory. An inventory generally comprises of 3 things. They are,
- Stock of completed commodities
- Raw materials and various other components
- Progressing work
There is a slight change in the definition of inventory when related to a trading company. Here inventory means the commodities which are produced for resale or they remain unsold. The inventory in case of a manufacturing company consists of few things. They are:
- Raw materials
- Semi-processed commodities
- Completed goods
- Stores
According to the definition provided by ICAI (Institute of Chartered Accountants of India), it states that as maintained by standard number accounting, inventories are the corporeal properties.
During a businesses’ standard course, inventories can make a sale by including maintenance supplies and commodities apart from supplementary machineries.
Inventory valuation is performed at a company’s closing economic year. For a company to evaluate their monetary position and operating performance, inventory valuation is very important.
Inventory Valuations and its Objectives
- During a certain accounting period, finding the calculation of actually earned profit by a company is the main objective of inventory.
- It also helps to regulate the accurate economic position by highlighting it as the current asset in a company’s Balance Sheet.
Inventory Valuations’ 4 Bases
- Market Price or Cost Price
The valuation of inventory is based on market price or cost price, specifically on the criteria of “whichever of the both is low.”
- Replacement Cost Method
Under this, the basis of the values of inventories depends on replacement value. Its consideration may be taken as reproduction value or market value.
- Historical Cost
It states that the value of inventory should be based on cost.
- Net Realizable Method
Under this, valuation of commodities is valued to the value of historical cost. This is because of lower selling price.
Links of Previous Main Topic:-
- Introduction to accounting and branches of accounting
- Preparation of final accounts
- Introduction of fund flow statement
- Introduction cash flow statement
- Ratio analysis significance of ratio analysis
- Fixed assets and depreciation meaning causes objectives methods and basic factor
- Cost accounting concept objectives advantages limitations general principles and cost sheet
- Job costing
- Introduction process costing
- Activity based costing introduction concept and classification
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