Introduction – Inventory Pricing and Valuation

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,

1. Stock of completed commodities
2. Raw materials and various other components
3. 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:

1. Raw materials
2. Semi-processed commodities
3. Completed goods
4. 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

1. During a certain accounting period, finding the calculation of actually earned profit by a company is the main objective of inventory.
2. 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

1. 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.”

2. 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.

3. Historical Cost

It states that the value of inventory should be based on cost.

4. Net Realizable Method

Under this, valuation of commodities is valued to the value of historical cost. This is because of lower selling price.