Inventory valuation

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   According to Kohler's Dictionary for Accountants, inventory is defined as " Raw materials and supplies, goods finished and in process of manufacture and merchandise on hand, in transit and owned, in storage or consigned to other at the end of an accounting period.


  Inventory forms a significant portion of the total assets  of many enterprises and a lot of working capital is invested in this item.


  Inventories generally constitute the second largest item after fixed assets, in the financial statements, particularly of manufacturing concerns.


 This is why valuation of inventories has assumed significance in recent years.


  The values attached to inventories can materially affect the operating results as shown by trading and profit and loss account and the financial position of a business firm because closing inventory (stock in trade) is shown on the credit side of the trading account and this amount is also shown as current asset in the Balance Sheet.


 The closing inventory becomes the opening inventory in the next Accounting period and shown on the debit side of trading account.


Thus the valuation of inventories does affect the operating results not only of the current accounting period but also of the subsequent period.


Inventory valuation is purely subjective depending upon the policies and the different bases of valuing inventories used by different business and even by different undertakings with in the same trade or industry.


  According to Accounting standards- A(As-2) ' inventories ' mean tangible property held.



(1)  for sale


(2)  in the process of production for sale.


(3) for computation in the production of goods or services for sale, inventories are normally classified in the financial statements as current assets as under:


i Raw materials and components


ii work - in process


iii Finished goods


iv Stories and spares.


Objectives of inventory valuations :

i To determine the cashment income


ii To present true and correct view of financial affairs


iii To compute the ratios





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