AS 2 Valuation of Inventories Practical's Paper 1: Financial Reporting Chapter 1 Unit 3

Transcription

1 AS 2 Valuation of Inventories Practical's Paper 1: Financial Reporting Chapter 1 Unit 3 CA B. Hari Gopal B.Com, PGDBA, FCA, FCMA, DISA(ICAI), PMP (PMI, USA), EPBM (IIMC), MCT

2 2 Learning Objectives 1. Gain insight in to knowledge testing aspects of Accounting Standard 2. Reviewing past examination questions and answers

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4 4 Question 1 A Private limited company manufacturing fancy terry towels had valued its closing stock of inventories of finished goods at the realisable value, inclusive of profit and export cash incentives. Firm contracts had been received and goods were packed for export, but the ownership in these goods had not been transferred to the foreign buyers. Comment on the valuation of the stocks by the company

5 5 Answer According to AS-2 Valuation of Inventories states that inventories should be valued at lower of historical cost and net realizable value. AS-9 on Revenue Recognition states, at certain stages in specific industries, such as when agriculture crops have been harvested or mineral ores have been extracted, performance may be substantially complete prior to the execution of the transaction generating revenues. In such cases, when sale is assured under forward contract or a government guarantee or when the market exists and there is a negligible risk of failure to sell, the goods invoiced are often valued at net realisable value.

6 6 Answer Cont.. Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly, taking into account the facts stated, the closing stock of finished goods (Fancy Terry Towel) should have been valued at lower of cost and net-realisable value and not at net realisable value. Further, export incentives are recorded only in the year the export sale take place. Therefore, the policy adopted by the company for valuing its closing stock of inventories of finished goods is not correct.

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8 8 Question 2 U.S.A Ltd. Purchased raw Rs.400/kg. Company does not sell raw materials but uses in production of finished goods. The finished goods in which raw material is used are expected to be sold at below cost. At the end of the accounting year, company is having 10,000 kg of raw materials in stock. As the company never sells the raw materials, it does not know the selling price of raw material and hence cannot calculate the realizable value of the raw materials for valuation of inventories at the end of the year. However replacement cost of the raw materials is Rs.300/kg. How will you value the inventory of raw material?

9 9 Answer As per Para 24 of AS-2 (Revised) Valuation of Inventories, materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realizable value.

10 10 Answer Cont.. In such circumstances, the replacement cost of the materials may be the best available measure of their net realizable value. Therefore, in this case USA Ltd. Will value the stock of raw materials at Rs.30, 00,000 (10,000 Rs.300/kg).

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12 12 Question 3 Night Ltd. Sells beer to customers; some of the customers consume the beer in the bars run by Night Limited. While leaving the bars, the consumers leave the empty bottles in the bars and the company take possession of these empty bottles. The company has laid down a detailed internal record procedure for accounting for the empty bottles which are sold by the company by calling for tenders.

13 13 Question Cont.. Keeping this in view: (i) Decide whether the stock of empty bottles is an asset of the company; (ii) If so, whether the stock of empty bottles existing as on the date of Balance sheet is to be considered as inventories of the company and valued as per AS-2 or to be treated as scrap and shown at realizable value with corresponding credit to Other Income

14 14 Answer Tangible objects or intangible rights carrying probable future benefits, owned by an enterprise are called assets. Night Ltd. sells these empty bottles by calling tenders. It means further benefits are accrued on its sale. Therefore, empty bottles are assets for the company.

15 15 Answer Cont.. (ii)as per AS-2 Valuation of Inventories, inventories are assets held for sale in the ordinary course of business. Stock of empty bottles existing on the balance sheet date is the inventory and Night Ltd has detailed controlled recording and accounting procedure which duly signify its materiality. Hence stock of empty bottles cannot be considered as scrap and should be valued as inventory in accordance with AS-2.

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17 17 Question 4 Anil Pharma Ltd. ordered 16,000 kg of certain material at Rs.160/kg. The purchase price includes excise duty Rs.10/kg in respect of which full CENVAT credit is admissible. Freight incurred amounted to Rs.1, 40,160. Normal transit loss is 2%. The company actually received 15,500 kg and consumed 13,600 kg of material. Compute cost of inventory under AS-2 and amount of abnormal loss.

18 18 Answer Calculation of total cost of material Particulars Amount (Rs.) Purchase Price (16,000 kg. x Rs ,60,000 Less: CENVAT credit (16,000 kg. x Rs.10) -1,60,000 24,00,000 Add: Freight 1,40,160 Total material cost 25,40,160 Number of units after normal loss= 16,000 kg. x (100-2)% = 15,680 kg Revised cost per kg. = 25, 40,160/15,680kg = Rs.162

19 19 Answer Cont.. Closing inventory =Material actually received- Material consumed = 15,500 kg- 13,600 kg = 1,900 kg Valuation of closing stock= 1,900 kg x Rs.162 = Rs.3, 07,800 Abnormal loss in kg =15,680 kg 15,500 kg = 180 kg. Abnormal loss in value =180 kg x Rs.162 = Rs.29,160

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21 21 Question 5 Particulars Kg. Amount (Rs.) Opening Stock: Finished Goods 1,000 25,000 Raw Materials 1,100 11,000 Purchases 10,000 1,00,000 Labour 76,500 Overheads(Fixed) 75,000 Sales 10,000 2,80,000 Closing Stock: Raw Materials 900 Finished Goods 1200 The expected production for the year was 15,000 kg of the finished product. Due to fall in the market demand the sales price of the finished goods was Rs.20/kg and the replacement cost for the raw materials was Rs.9.50 per kg on the closing day. You are required to calculate the closing stock as on that date.

22 22 Answer Working Note 1 Raw Material Consumption Particulars Quantity (in Kg) Opening Stock of Raw Materials 1,100 Add: Purchases 10,000 11,100 Less: Closing Stock of Raw Materials 900 Raw Material Consumed 10,200 Working Note 2 Quantity Produced Particulars Quantity (in Kg) Sales 10,000 Add: Closing Stock of Finished Goods 1,200 11,200 Opening Stock of Finished Goods 1,000 Production 10,200

23 23 Answer Calculation of cost of closing stock Particulars Amount (Rs.) Cost of Raw Material (10,200 x 10) 1,02,000 Direct Labour 76,500 Fixed Overhead (75,000 x 10,200)/15,000 51,000 Cost of Production 2,29,500 Cost of Closing stock per unit(2,29,500/10,200) Rs Net Realisable Value per unit Rs Since net realisable value is less than cost, closing stock will be valued at Rs.20. As NRV of the finished goods is less than its cost, relevant raw materials will be valued at replacement cost i.e. Rs.9.50.

24 24 Answer Cont Therefore, value of closing stock: Finished Goods (1,200 x 20) Rs.24, 000 Add: Raw Materials (900x9.50) Rs. 8, 550 Value of closing stock Rs.32, 550

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26 26 Question 6 The closing inventory at cost of a company amounted to Rs.2, 84,700. The following items were included at cost in the total: (a) 400 coats, which had cost Rs.80 each and normally sold for Rs.150 each. Owing to their defect in manufacture, they were all sold after the balance sheet date at 50% of their normal price. Selling expenses amounted to 5% of the proceeds. (b) 800 skirts, which had cost Rs.20 each. These too were found to be defective. Remedial work in April cost Rs.5 per skirt, and selling expenses for the batch totalled Rs.800. They were sold for Rs.28 each. What should the inventory value be according to AS-2 after considering the above items?

27 27 Answer Valuation of closing stock Particulars Amount (Rs.) Amount (Rs.) Closing Stock at cost 2,84,700 Less: Cost of 400 coats (400x80) 32,000 Less: Net Realisable Value (400x75) -5% 28,500 3,500 Value of Closing Stock 2,81,200

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29 29 Question 7 State with reference to accounting standard, how you will value the inventories in the following case: Raw Material was purchased at Rs.100 per kilo. Price of Raw material is on the decline. The Finished goods in which the raw Materials are incorporated are expected to be sold at below cost. 10,000 kgs. of raw materials is on stock at the year end. Replacement cost is Rs.80 per kg

30 30 Answer As per Para24 of AS-2 (Revised) Valuation of Inventories, materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realizable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realizable value. Hence, in the given case, the stock of 10,000 kgs of raw materials will be valued Rs.80 per kg. The finished goods, if on stock, should be valued at cost or net realisable value whichever is lower.

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32 32 Question 8 State with reference to accounting standard, how you will value the inventories in the following case: In a production process, normal wastage is 5% of input. 5,000 MT of input were put in process resulting in a wastage of 300 MT. Cost per MT of input is Rs.1, 000. The entire quantity of waste is on stock at the year end.

33 33 Answer As per Para 13 of AS-2 (Revised), abnormal amounts of waste materials, labour or other production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in which they are incurred. In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be included in determining the cost of inventories (finished goods) at the year end. The cost of abnormal waste amounting to Rs.52, 632 (50 MT x (Rs.50,00,000/4,750 MT)) will be charged in the profit and loss statement.

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35 35 Question 9 State with reference to accounting standard, how you will value the inventories in the following case: Per kg. of finished goods consisted of: Material Cost Direct Labour Cost Direct variable production overhead Rs.100 per kg Rs 20 per kg Rs. 10 per kg Fixed Production charges for the year on normal capacity of one lakh kgs is Rs.10 lakhs. 2, 000 kgs of finished goods are on stock at the year end.

36 36 Answer In accordance with Paras 8 and 9 of AS-2 ( Revised), the costs of conversion include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. The allocation of fixed production overheads for the purpose of their inclusion in the cost of conversion is based on the normal capacity of the production facilities. Thus, cost per kg. of finished goods can be computed as follows:

37 37 Answer Cont.. Particulars Amount (Rs) Material Cost 100 Direct Labour Cost 20 Direct variable production overhead 10 Fixed production overhead 10 (Rs.10,00,000/1,00,000) 140 Thus the value of 2,000 kgs. of finished goods on stock at the year end will be Rs.2,80,000( 2,000 kgs. x Rs.140)

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39 39 Question 10 The company deals in three products- A,B and C which are neither similar nor interchangeable. At the time of closing of its account for the year , the Historical Cost and Net Realizable Value of the items of closing stock are determined as follows: Items Historical Cost Net Realizable Value (Rs. In lakhs) (Rs. In lakhs) A B C What will be the value of closing Stock?

40 40 Answer A per Para 5 of AS-2 on Valuation of Inventories, Inventories should be valued at the lower of cost and net realizable value. Inventories should be written down to net realizable value on an item by-item basis in the given case. Items Historical Cost (Rs. In lakhs) Net Realizable Value (Rs. In lakhs) Valuation of Closing Stock ( Rs. In lakhs) A B C Hence, closing stock will be valued at Rs.76 Lakhs

41 Thank You 41