Hint - Inventory is the Stock and it is the Closing Stock which requires Valuation.
RULE - Inventory is valued at lower of Cost or Market Value.
Where
Cost = Purchase + conversion + Other Costs
and
Market Value = NRV (Net Realisable Value i.e. Selling Price – Costs of Completion/Sale)
But…
Above rule doesn’t apply to followings because these are valued at NRV only :-
i) Crops
ii) Mineral Ore
iii) Waste Material (like Non-reusable waste or Re-usable waste for which reprocessing facilities do not exist)
Here point i) and ii) given above are valued at NRV only if sale is assured as under :-
a) Forward Contract
b) Government Guarantee
c) Market Exists and there is negligible risk of failure to sell
STAUTORY COMPLIANCE :-
Followings are give different aspects for Inventory Valuation :-
1. Accounting Standard – 2
2. Income Tax Act – 1961 (Section 145A)
3. Companies Act – 1956 (Schedule VI, Part I)
Hereunder are the above aspects in detail :-
As per AS – 2
Definition
Goods purchased and held for resale excluding Financial instruments like Share/Debentures
Finished goods held for sale excluding Livestock, agro/forest products
WIP (Work in Progress) excluding Construction or service contracts
Valuation
Cost (as defined above) excluding Excise Duty for which Credit is to be availed
Classification
(i) Raw materials and components
(ii) WIP
(iii) Finished goods
(iv) Stores and spares and Loose tools.
As per Income Tax Act – 1961 (Section 145A)
Valuation
Cost (as defined above) including Excise Duty for which Credit is to be availed
NOTE
1. Here it is to be noted that CenVAT Credit on Input Material is also to be added in Stock Valuation.
2. Stock Valuation can be different for Tax purpose and Balance Sheet Purpose
As per Companies Act – 1956 (Schedule VI, Part I)
Valuation
as per AS-2
Classification
(i) Stores and spares
(ii) Loose tools
(iii) Stock-in-trade
(iv) WIP
