26) Technical - Tell me what u know about Inventory Valuation.

Monday, October 20, 2008

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.

Cost = Purchase + conversion + Other Costs
Market Value = NRV (Net Realisable Value i.e. Selling Price – Costs of Completion/Sale)

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


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

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

Cost (as defined above) excluding Excise Duty for which Credit is to be availed

(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)

Cost (as defined above) including Excise Duty for which Credit is to be availed

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)

as per AS-2

(i) Stores and spares
(ii) Loose tools
(iii) Stock-in-trade
(iv) WIP


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