{"id":329,"date":"2018-10-12T05:30:36","date_gmt":"2018-10-12T05:30:36","guid":{"rendered":"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/?post_type=chapter&#038;p=329"},"modified":"2019-01-10T08:36:50","modified_gmt":"2019-01-10T08:36:50","slug":"valuation-of-inventories-need-and-methods","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/chapter\/valuation-of-inventories-need-and-methods\/","title":{"rendered":"Valuation of Inventories: Need and Methods"},"content":{"raw":"<div><span style=\"float: right\"><a href=\"https:\/\/youtu.be\/kQ0vDV_OHQI\" target=\"_blank\" rel=\"noopener\"><img src=\"http:\/\/epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/2018\/11\/download.png\" alt=\"epgp books\" width=\"75px\" height=\"75px;\" \/><\/a>\r\n<\/span><\/div>\r\n<div>\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n<strong>LEARNING OBJECTIVES:<\/strong>\r\n\r\n&nbsp;\r\n\r\nThis module will help the students to:\r\n\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Understand the Meaning of Inventory and Inventory Valuation\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Recognise the Importance of Inventory Valuation\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Assess the Technical Features of Inventory Records System\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Distinguish between Periodic Inventory System and Perpetual Inventory System\r\n\r\n&nbsp;\r\n\r\n<strong>INTRODUCTION<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Preparation of accurate income statement and balance sheet of a concern depends on correct valuation of its inventory. Companies may have inventories held in the form of raw materials, work-in-progress, finished goods, products bought for resale, and service In trading concern inventory means stock of finished goods only. In a manufacturing concern, it may include raw materials, work in process and stores, etc. All enterprises requires inventory for smooth running\u00a0<span style=\"text-align: initial;font-size: 1em\">of its activities. There should be a proper system for determining the quantities and value of inventories sold and in hand<\/span><strong style=\"text-align: initial;font-size: 1em\">.<\/strong><\/p>\r\n\r\n<\/div>\r\n&nbsp;\r\n\r\n<strong>MEANING OF INVENTORY<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Inventories include goods purchased or manufactured by a concern and remain unconsumed or unsold. Inventory\u201f is also known with name of \u201emerchandise\u201f or \u201estock-in-trade. Further, the term Inventories also include those goods which are in process of production i.e. work-in-progress. All enterprises requires inventory for smooth running of its activities.<\/p>\r\n&nbsp;\r\n\r\n<strong>DEFINITION OF INVENTORY<\/strong>\r\n\r\n&nbsp;\r\n\r\nThe word inventory is defined by different authors differently.\r\n\r\n&nbsp;\r\n\r\n<strong>The dictionary meaning of inventory <\/strong>is \u201estock of goods, or a list of goods\u201f.\r\n\r\n&nbsp;\r\n\r\n<strong>As a verb the term inventory means <\/strong>to take count of (or list) units of a resource on hand at one point in time.\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>According to the Accounting Standard 2 (Revised) <\/strong>According to this Accounting Standard, inventories are assets.<\/p>\r\n\r\n<ul>\r\n \t<li style=\"text-align: justify\">held for sale in the ordinary course of business,<\/li>\r\n \t<li style=\"text-align: justify\">in the process of production for such sale, or<\/li>\r\n \t<li style=\"text-align: justify\">in the form of materials or supplies to be consumed in the production process or in the rendering of services.<\/li>\r\n<\/ul>\r\n<strong>CATEGORIES OF INVENTORY<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">On the basis of nature of the business the inventory can be defined as below<\/p>\r\n<img class=\"size-full wp-image-332 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-132.png\" alt=\"\" width=\"820\" height=\"384\" \/>\r\n<div>\r\n\r\n<strong>Trading concern<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">The inventories of a trading concern include mainly products purchased for resale in their existing form. It also consists of an inventory of supplies such as cartons, wrapping paper and stationery. Simply, in case of a trading concern, inventory primarily consists of<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 finished goods\r\n\r\n&nbsp;\r\n\r\n<strong>Manufacturing concern<\/strong>\r\n\r\n&nbsp;\r\n\r\nIn case of a manufacturing concern, inventory consists of\r\n\r\n<\/div>\r\n<div>\r\n<ul>\r\n \t<li>\u00a0 \u00a0raw materials,<\/li>\r\n \t<li>\u00a0 work-in-process,<\/li>\r\n \t<li>\u00a0 Finished goods.<\/li>\r\n \t<li>\u00a0Consumables and Spare<\/li>\r\n<\/ul>\r\nThese are explained as below\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0<strong>Raw Material <\/strong>Raw material is an important input for the production of finished goods in the organization. They are most important requirement for carrying out production activities uninterruptedly.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0<strong>Work in Progress <\/strong>The work-in-progress is the stage of stocks which is between raw materials and finished goods. The raw materials enter the process of manufacture but they have not attained the final shape of finished goods.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0<strong>Finished goods <\/strong>These are the goods which are ready for sale to the consumers. The aim of maintaining inventory of finished goods is to ensure proper supply of goods to customers.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0 \u00a0<strong>Consumables and Spare: <\/strong>Consumables are needed to carry smoothly the process of production. These materials do not directly enter production but they act as catalysts in production process. Spares also form a part of inventory. The Consumption pattern of raw materials, finished goods, consumables are different from that of spares. The policies of stocking of spares are different in different industries. Some industries like transport will need more spares than the other concerns.<\/p>\r\n&nbsp;\r\n\r\n<strong>INVENTORY VALUATION<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">The main objective of valuation of inventories is the proper determination of income through the process of matching appropriate costs against revenues. Valuation of inventories assigns proper costs to inventory as well as goods sold. Inventories influence both the balance sheet and the statement of financial position. The inventories held by a business invariably have considerable value and a large amount of money is invested in these. Preparation of accurate income statement and balance sheet of a concern largely depends on correct valuation of its inventory. Valuation of inventories needed in order<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 To determine cost of goods sold for matching it against the sales for that period and to know gross profit.\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 To determine the value of the stock in hand at the end of its financial period as stock is an important current asset in the statement of financial position.<\/p>\r\n&nbsp;\r\n\r\n<strong>OBECTIVES OF INVENTORY VALUATION<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Inventory has to be properly valued because of the following reasons:<\/p>\r\n&nbsp;\r\n\r\n<strong>(1) Determination of profitability<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Inventory is an important item for determining the true profitability a business. Gross profit is determined by deducting the cost of goods sold from sales. Excess of sales over cost of goods sold is called gross profit. Cost of goods sold is ascertained by adjusting the opening and closing stocks to purchases, and it is shown as below:<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Cost of goods sold = Beginning Inventories + Purchases \u2013 Inventories at the end.<span style=\"text-align: initial;font-size: 1em\">It is clear from the above formula that that the values of inventories have important impact on the cost and the gross profit. Further, it also reveals that the undervaluation or overvaluation of inventories will seriously affect the profitability of the concern.<\/span><\/p>\r\n\r\n<\/div>\r\n<div>\r\n\r\n<strong>(ii) Ascertainment of financial position<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Inventory also plays an important role in the determination of the financial position of an enterprise. Closing stock or inventories at the end of a period are shown as a current asset in the balance sheet. In case the inventory is not properly valued, the balance sheet<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 will not disclose the correct financial position of the business<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 will give a misleading picture about the working capital position of the concern<\/p>\r\n&nbsp;\r\n\r\n<strong>SIGNIFICANCE OF INVENTORY VALUATION<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Inventory is important current assets of a business concern. It is widely affects efficiency of operations of an enterprise. Both, excess and shortage of inventory affect the productivity and the profitability of the concern. Inventory is an important barometer of business activity. The significance, of inventory valuation is explained below:<\/p>\r\n<strong>1. Lifeblood of the concern<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Inventory may be termed as \"lifeblood\" of the concern. An inventory enables<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 sale,\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 customer satisfaction,\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Productive work for company employees. Without inventory the business dies.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>2.\u00a0 <\/strong><strong>Impact on liquidity Position: <\/strong>Liquidity refers to firm\u201fs ability to pay its short term liabilities in time. The liquidity is generally measured through<\/p>\r\n<strong>\u00a0<\/strong>\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <strong>Net Working Capital: <\/strong>Inventory is important component of net working capital.\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <strong>Current Ratio: <\/strong>Current ratio shows the relationship between current assets and current liabilities.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Thus, correct valuation of inventories is very much essential for a concern. If the valuation of inventories is not done accurately then this provide misleading information about liquidity position of the business.<\/p>\r\n&nbsp;\r\n\r\n<strong>3. Effect on Income Statements<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">An accurate valuation is important as incorrect inventory valuation effects following in the Income statement<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Cost of goods sold\r\n\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Gross Profit\r\n\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Net Income\r\n\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 balance of retained earnings\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 If ending inventory overstated= cost of goods sold is understated= resulting in overstated gross profit and net income.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 If ending inventory understated= cost of goods sold is overstated= resulting in understated gross profit and net income.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 If opening inventory is overstated= cost of goods sold is overstated= resulting in understated gross profit and net income.<\/p>\r\n\r\n<\/div>\r\n<ul>\r\n \t<li style=\"text-align: justify\">If opening inventory is understated= cost of goods sold is understated= resulting in overstated gross profit and net income.<\/li>\r\n<\/ul>\r\n<ol start=\"4\">\r\n \t<li><strong>Effect on balance sheet<\/strong><\/li>\r\n<\/ol>\r\n<p style=\"text-align: justify\">Generally, inventory is the largest of the current assets of a business entity. Inventories are disclosed under the heading Current Assets on the balance sheet. An accurate valuation is important as incorrect inventory valuation effects following in the balance sheet<\/p>\r\n\r\n<ul>\r\n \t<li>Current Asset<\/li>\r\n \t<li>Working capital<\/li>\r\n \t<li>Total assets<\/li>\r\n \t<li>Retained earnings.<\/li>\r\n<\/ul>\r\n<p style=\"text-align: justify\">The balance sheet will not give a true and fair view of the affairs of the business. It is necessary to properly value ending inventory. Because overstatement of ending inventory causes<\/p>\r\n\r\n<ul>\r\n \t<li>current assets to be overstated<\/li>\r\n \t<li>total assets to be overstated<\/li>\r\n \t<li>Retained earnings to be overstated.<\/li>\r\n<\/ul>\r\n<ol start=\"5\">\r\n \t<li><strong>Effect two years statements<\/strong><\/li>\r\n<\/ol>\r\n<p style=\"text-align: justify\">\u00a0 \u00a0 \u00a0In fact, an incorrect inventory valuation will effect two years income statements, because inventory at the end of one accounting period will automatically become the inventory at the beginning in nest period. When a- company makes mistake in valuation its ending inventory in the current year, the company carries forward that erroneous ending inventory in the next year.<\/p>\r\n&nbsp;\r\n\r\n<img class=\"size-full wp-image-334 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-133.png\" alt=\"\" width=\"748\" height=\"404\" \/>\r\n\r\n<strong>INVENTORY RECORD SYSTEMS<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">There are mainly two systems of determining the quantities and value of inventories sold and in hand. One system is termed as the periodic inventory system and the other is known as the perpetual inventory system. These are explained as below in detail:<\/p>\r\n<img class=\"size-full wp-image-335 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-134.png\" alt=\"\" width=\"810\" height=\"341\" \/>\r\n\r\n<strong>PERIODIC INVENTORY SYSTEM<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Periodic inventory system requires a physical verification or count of all the inventory items in hand at specific times. Because in periodic inventory system actual physical verification of stock is done the system is also called physical inventory system. In case of this system the quantity and value of inventory is determined only at the end of the accounting period after the physical verification or count of the units of inventory in hand. The periodic system relies heavily on physical count of the inventory to determine<\/p>\r\n\r\n<ul>\r\n \t<li>the ending inventory balance<\/li>\r\n \t<li>the cost of goods sold.<\/li>\r\n<\/ul>\r\n<strong>Calculation of cost of materials used<\/strong>\r\n\r\n&nbsp;\r\n\r\nThe cost of goods sold is determined as shown below\r\n\r\n<img class=\"size-full wp-image-336 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-135.png\" alt=\"\" width=\"653\" height=\"488\" \/>\r\n<p style=\"text-align: justify\">In periodic inventory system the physical counting is done for determination of value of inventor. On the basis of this counting all corrections are made to ensure the accuracy of the inventory figure shown in the accounts.<\/p>\r\n&nbsp;\r\n\r\n<strong>(b) Less expensive<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Periodic inventory system is less expensive than the continuous inventory system.<\/p>\r\n&nbsp;\r\n\r\n<strong>LIMITATIONS OF PERIODIC INVENTORY SYSTEM <\/strong>The following are the main drawbacks of this method:\r\n\r\n&nbsp;\r\n\r\n<strong>(i) Based on wrong assumption<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Periodic inventory method is based on the assumption that all goods which are not recorded or found by physical inventory count have been either sold or used. Due to this assumption losses due to theft, waste, evaporation etc. are taken in the cost of the goods sold. Thus figure of cost of the goods sold may not be accurate.<\/p>\r\n&nbsp;\r\n\r\n<strong>(ii) Adversely affect normal business operations<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">In this method physical counting is done at the end of accounting period due to this normal business operations will be adversely affected for a number of days. The businesses which are using this method have to stop their normal business operations and employ number of employees for the physical count and valuation of the inventory.<\/p>\r\n&nbsp;\r\n\r\n<strong>(iii) Fail when income statements required frequently<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Periodic inventory method fails when income statements are required more frequently than once a year. In this case this method would become very expensive.<\/p>\r\n&nbsp;\r\n\r\n<strong>(iv) Not providing information continuously<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Periodic inventory system does not provide the information regarding the quantity and value of materials in hand on a continuous basis.<\/p>\r\n&nbsp;\r\n\r\n<strong>(v) No Recording for losses<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">In periodic inventory system no accounting is done for losses such as shrinkage, theft, and wastage.<\/p>\r\n&nbsp;\r\n\r\n<img class=\"size-full wp-image-337 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-136.png\" alt=\"\" width=\"779\" height=\"452\" \/>\r\n<div>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <strong>According to the Chartered Institute of Management Accountants London<\/strong>: Perpetual Inventory System is a system of records maintained by the controlling department, which reflects the physical movement of stocks and their current balance.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <strong>According to the Wheldon<\/strong>: It is \u201ca method of recording inventory balances after every receipt and issue to facilitate regular checking and to obviate closing down for stocktaking.\u201d<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Perpetual Inventory System is also known as an Automatic Inventory System. In this system balance of raw materials, work-in-progress, and finished goods is provided on a continuing basis. The main aim of this system is to provide all times the information in detail about the quantity and value of stock. This maintains usual ledger accounts for each inventory item. The detailed inventory records for each different item (usually in both quantities and value.) must show:<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Receipts (Purchases);\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Issues (Sales),\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Balance on hand,\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">When goods-are purchased or sold, the inventories must be adjusted immediately.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>BENEFITS OF PERPETUAL INVENTORY SYSTEM <\/strong>The benefits of a perpetual inventory system may be noted as:<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Perpetual Inventory System is also known as an Automatic Inventory System.<\/p>\r\n&nbsp;\r\n\r\n<strong>2. Continuing basis<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">In perpetual inventory system provides balance of raw materials, work-in-progress, and finished goods on a continuing basis.<\/p>\r\n&nbsp;\r\n\r\n<strong>3. Information Available at any times<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">The basic objective of this system is to make available details about the quantity and value of stock of each item at all times.<\/p>\r\n&nbsp;\r\n\r\n<strong>4. Provides a rigid control<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Perpetual inventory system helps in exercising a rigid control over stock of materials, as physical stock can be verified with the stock records.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>5.\u00a0 <\/strong><strong>No Interruption<\/strong>: The normal business operations are not interrupted by perpetual inventory system.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">6.\u00a0 <strong>No need for stock taking by actual count<\/strong>: Perpetual inventory system obviates the need for stock taking by actual physical count at the end of accounting period.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">7.\u00a0\u00a0 <strong>Suitable when volume of inventory items is large<\/strong>: Perpetual inventory system has to be applied when the volume of inventory items is very large and it is impossible to make a complete count.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>8.\u00a0 <\/strong><strong>No need of Special staff: <\/strong>In Perpetual inventory system special staff may be employed for stock taking.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>9.\u00a0\u00a0 <\/strong><strong>Controlling losses<\/strong>: Controlling losses is easier under a perpetual system because inventory records prepared under perpetual system continuously indicate the goods that must be on hand.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>10.\u00a0 <\/strong><strong>No out of stock situation<\/strong>: Perpetual inventory system continuously provides detail of goods that must be on hand. So, there will be no sudden out of stock situation.<\/p>\r\n&nbsp;\r\n\r\n<strong>LIMITATIONS OF THE SYSTEM:<\/strong>\r\n\r\n<\/div>\r\n<p style=\"text-align: justify\">Perpetual inventory system is costly to maintain in those business firms which deal with numerous items of small value.<\/p>\r\n&nbsp;\r\n\r\n<strong>PERPETUAL INVENTORY SYSTEM<\/strong>\r\n<ul>\r\n \t<li style=\"text-align: justify\">The perpetual system keeps continual track record of inventory balances.<\/li>\r\n \t<li style=\"text-align: justify\">Perpetual Inventory System is also known as an Automatic Inventory System.<\/li>\r\n \t<li style=\"text-align: justify\">In this system balance of raw materials, work-in-progress, and finished goods is provided on a continuing basis<\/li>\r\n<\/ul>\r\n<strong>BENEFITS OF PERPETUAL INVENTORY SYSTEM<\/strong>\r\n<ul>\r\n \t<li>Automatic Inventory System<\/li>\r\n \t<li>Continuing basis<\/li>\r\n \t<li>Provide information about stock at all times<\/li>\r\n \t<li>Provides a rigid control<\/li>\r\n \t<li>No Interruption in normal business operations<\/li>\r\n \t<li>No need for stock taking by actual count<\/li>\r\n \t<li>Suitable when volume of inventory items is large<\/li>\r\n \t<li>Special staff may not be employed<\/li>\r\n \t<li>Controlling losses<\/li>\r\n \t<li>Check on irregularities or changes in procedures by storekeepers<\/li>\r\n \t<li>No sudden \u201eout of stock situation<\/li>\r\n<\/ul>\r\n<strong>LIMITATIONS OF PERPETUAL INVENTORY SYSTEM<\/strong>\r\n<ul>\r\n \t<li>costly to maintain especially for those business firms which deal with numerous items of small value<\/li>\r\n<\/ul>\r\n<div>\r\n\r\n<strong>DIFFERENCE BETWEEN PERIODIC INVENTORY SYSTEM AND PERPETUAL INVENTORY SYSTEM<\/strong>\r\n\r\n&nbsp;\r\n\r\nThe following are the major differences between perpetual and periodic inventory system:\r\n\r\n&nbsp;\r\n\r\n<strong>Difference betwe<\/strong>en<strong> Periodic inventory system and perpetual inventory system<\/strong>\r\n\r\n&nbsp;\r\n\r\n<\/div>\r\n<img class=\"size-full wp-image-338 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-137.png\" alt=\"\" width=\"733\" height=\"385\" \/>\r\n\r\n<img class=\"size-full wp-image-339 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-138.png\" alt=\"\" width=\"410\" height=\"565\" \/>\r\n<div>\r\n\r\n<strong>Conclusion: <\/strong>Following conclusion can be drawn from above\r\n\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Periodic Inventory System is less costly.\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Perpetual Inventory System but it gives more accurate information.\r\n\r\n<\/div>\r\n<ul>\r\n \t<li style=\"text-align: justify\">The financial statements prepared quickly as the inventory records are maintained properly in the Perpetual Inventory System.<\/li>\r\n \t<li style=\"text-align: justify\">The Perpetual Inventory System is best suited for big enterprises.<\/li>\r\n \t<li style=\"text-align: justify\">Small enterprises can go for Periodic Inventory System.<\/li>\r\n \t<li style=\"text-align: justify\">Firm generally employs periodic inventory method for low unit selling price.<\/li>\r\n<\/ul>\r\n<strong>SUMMARY<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Inventories include goods purchased or manufactured by a concern and remain are unconsumed or unsold goods. Inventories influence both the balance sheet and the income statement. There are mainly two systems of determining the quantities and value of inventories sold and in hand. One is periodic inventory system and the other is known as the perpetual inventory system. The periodic system relies upon physical count of the inventory to determine the ending inventory balance and the cost of goods sold. Perpetual Inventory System is also known as an Automatic Inventory System. In this system balance of raw materials, work-in-progress, and finished goods is provided on a continuing basis. The Periodic Inventory System is less costly than the Perpetual Inventory System but it gives more accurate information.<\/p>\r\n&nbsp;\r\n\r\n<strong>FEW SUGGESTED BOOKS TO LEARN MORE ABOUT INVENTORY VALAUTION<\/strong>\r\n\r\n&nbsp;\r\n<ul>\r\n \t<li style=\"text-align: justify\">Tulsian . P.C (2014) \u201cFinancial Accounting\u201d Pearson Education India.<\/li>\r\n \t<li style=\"text-align: justify\">Lal, Jawahar\u00a0 and\u00a0 Seema\u00a0 Srivastava\u00a0 (2004)\u00a0 \u201cFinancial\u00a0 Accounting\u201d\u00a0 S.Chand(G\/L) &amp; Company Ltd.<\/li>\r\n \t<li style=\"text-align: justify\">Goyal, V.K. and Ruchi Goyal (2012) \u201cFinancial Accounting\u201d PHI.<\/li>\r\n \t<li style=\"text-align: justify\">Maheshwari, S.N., Suneel K Maheshwari and Sharad K Maheshwari(2012) \u201cFinancial Accounting\u201d Vikas Publishing House Pvt Ltd<\/li>\r\n \t<li style=\"text-align: justify\">Raiyani Jagadish R International Financial Reporting Standards (IFRS) &amp; Indian Accounting Practices\u201d New Century Publications.<\/li>\r\n \t<li style=\"text-align: justify\">Patel, Chintan N. and Bhupendra Mantri (2015) \u201cIndian Accounting Standards (IND AS)\u201d Taxmann.<\/li>\r\n \t<li style=\"text-align: justify\">Monga, J.R. \u201cAvanced Financial Accounting\u201d Mayoor Paperbacks.<\/li>\r\n \t<li style=\"text-align: justify\">Bhattacharyya Ashis K., (2012)\u201d Essentials of Financial Accounting\u201d PHI.<\/li>\r\n<\/ul>\r\n&nbsp;\r\n\r\n<strong>POINTS TO PONDER<\/strong>\r\n\r\n&nbsp;\r\n<ol>\r\n \t<li><strong>MEANING OF INVENTORY<\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n \t<li>In trading concern. it may mean stock of finished goods only.<\/li>\r\n \t<li>In a manufacturing concern, it may include raw materials, work in process and stores, etc<\/li>\r\n \t<li>Preparation of accurate income statement and balance sheet of a concern depends on correct valuation of its inventory.<\/li>\r\n<\/ul>\r\n<ol start=\"2\">\r\n \t<li><strong>OBECTIVES OF INVENTORY VALUATION<\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n \t<li>Determination of profitability<\/li>\r\n \t<li>Ascertainment of financial position<\/li>\r\n<\/ul>\r\n<ol start=\"3\">\r\n \t<li><strong>SIGNIFICANCE OF INVENTORY VALUATION<\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n \t<li>Lifeblood of the concern<\/li>\r\n \t<li>Impact on liquidity Position \u00b7 Effect on Income Statements \u00b7 Effect on balance sheet<\/li>\r\n \t<li>Effect two years statements<\/li>\r\n<\/ul>\r\n<ol start=\"4\">\r\n \t<li><strong>PERIODIC INVENTORY SYSTEM<\/strong><\/li>\r\n<\/ol>\r\n&nbsp;\r\n\r\nThis system requires a physical verification or count of all the inventory items on hand at specific times. Because of actual physical verification of stock the system is also called physical inventory system.\r\n<ol start=\"5\">\r\n \t<li><strong>BENEFITS OF PERIODIC INVENTORY SYSTEM<\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n \t<li>Ensure the accuracy of the accounts \u00b7 Less expensive<\/li>\r\n<\/ul>\r\n<ol start=\"6\">\r\n \t<li><strong>LIMITATIONS OF PERIODIC INVENTORY SYSTEM<\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n \t<li>Based on wrong assumption<\/li>\r\n \t<li>Adversely affect normal business operations<\/li>\r\n \t<li style=\"text-align: justify\">Becomes expensive when income statements are required more frequently \u00b7 Not provide the information on a continuous basis<\/li>\r\n \t<li>No accounting is for shrinkage, losses, theft, and wastage<\/li>\r\n<\/ul>\r\n&nbsp;\r\n<ol start=\"7\">\r\n \t<li><strong>BENEFITS OF PERPETUAL INVENTORY SYSTEM<\/strong><\/li>\r\n<\/ol>\r\n<ul>\r\n \t<li>Automatic Inventory System<\/li>\r\n \t<li>Continuing basis<\/li>\r\n \t<li>Provide information about stock at all times<\/li>\r\n \t<li>Provides a rigid control<\/li>\r\n \t<li>No Interruption in normal business operations<\/li>\r\n \t<li>No need for stock taking by actual count<\/li>\r\n \t<li>Suitable when volume of inventory items is large<\/li>\r\n \t<li>Special staff may not be employed<\/li>\r\n \t<li>Controlling losses<\/li>\r\n \t<li>Check on irregularities or changes in procedures by storekeepers<\/li>\r\n \t<li>No sudden \u201eout of stock situation<\/li>\r\n<\/ul>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>you can view video on Valuation of Inventories: Need and Methods<\/strong><\/td>\r\n<td><a href=\"https:\/\/youtu.be\/kQ0vDV_OHQI\" target=\"_blank\" rel=\"noopener\"><img class=\"alignnone wp-image-120\" src=\"http:\/\/epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/2018\/11\/download.png\" alt=\"\" width=\"36\" height=\"36\" \/><\/a><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>","rendered":"<div><span style=\"float: right\"><a href=\"https:\/\/youtu.be\/kQ0vDV_OHQI\" target=\"_blank\" rel=\"noopener\"><img decoding=\"async\" src=\"http:\/\/epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/2018\/11\/download.png\" alt=\"epgp books\" width=\"75px\" height=\"75px;\" \/><\/a><br \/>\n<\/span><\/div>\n<div>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><strong>LEARNING OBJECTIVES:<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>This module will help the students to:<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Understand the Meaning of Inventory and Inventory Valuation<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Recognise the Importance of Inventory Valuation<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Assess the Technical Features of Inventory Records System<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Distinguish between Periodic Inventory System and Perpetual Inventory System<\/p>\n<p>&nbsp;<\/p>\n<p><strong>INTRODUCTION<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Preparation of accurate income statement and balance sheet of a concern depends on correct valuation of its inventory. Companies may have inventories held in the form of raw materials, work-in-progress, finished goods, products bought for resale, and service In trading concern inventory means stock of finished goods only. In a manufacturing concern, it may include raw materials, work in process and stores, etc. All enterprises requires inventory for smooth running\u00a0<span style=\"text-align: initial;font-size: 1em\">of its activities. There should be a proper system for determining the quantities and value of inventories sold and in hand<\/span><strong style=\"text-align: initial;font-size: 1em\">.<\/strong><\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<p><strong>MEANING OF INVENTORY<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Inventories include goods purchased or manufactured by a concern and remain unconsumed or unsold. Inventory\u201f is also known with name of \u201emerchandise\u201f or \u201estock-in-trade. Further, the term Inventories also include those goods which are in process of production i.e. work-in-progress. All enterprises requires inventory for smooth running of its activities.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>DEFINITION OF INVENTORY<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>The word inventory is defined by different authors differently.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>The dictionary meaning of inventory <\/strong>is \u201estock of goods, or a list of goods\u201f.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>As a verb the term inventory means <\/strong>to take count of (or list) units of a resource on hand at one point in time.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>According to the Accounting Standard 2 (Revised) <\/strong>According to this Accounting Standard, inventories are assets.<\/p>\n<ul>\n<li style=\"text-align: justify\">held for sale in the ordinary course of business,<\/li>\n<li style=\"text-align: justify\">in the process of production for such sale, or<\/li>\n<li style=\"text-align: justify\">in the form of materials or supplies to be consumed in the production process or in the rendering of services.<\/li>\n<\/ul>\n<p><strong>CATEGORIES OF INVENTORY<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">On the basis of nature of the business the inventory can be defined as below<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-332 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-132.png\" alt=\"\" width=\"820\" height=\"384\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-132.png 820w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-132-300x140.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-132-768x360.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-132-65x30.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-132-225x105.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-132-350x164.png 350w\" sizes=\"auto, (max-width: 820px) 100vw, 820px\" \/><\/p>\n<div>\n<p><strong>Trading concern<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">The inventories of a trading concern include mainly products purchased for resale in their existing form. It also consists of an inventory of supplies such as cartons, wrapping paper and stationery. Simply, in case of a trading concern, inventory primarily consists of<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 finished goods<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Manufacturing concern<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>In case of a manufacturing concern, inventory consists of<\/p>\n<\/div>\n<div>\n<ul>\n<li>\u00a0 \u00a0raw materials,<\/li>\n<li>\u00a0 work-in-process,<\/li>\n<li>\u00a0 Finished goods.<\/li>\n<li>\u00a0Consumables and Spare<\/li>\n<\/ul>\n<p>These are explained as below<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0<strong>Raw Material <\/strong>Raw material is an important input for the production of finished goods in the organization. They are most important requirement for carrying out production activities uninterruptedly.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0<strong>Work in Progress <\/strong>The work-in-progress is the stage of stocks which is between raw materials and finished goods. The raw materials enter the process of manufacture but they have not attained the final shape of finished goods.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0<strong>Finished goods <\/strong>These are the goods which are ready for sale to the consumers. The aim of maintaining inventory of finished goods is to ensure proper supply of goods to customers.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0 \u00a0<strong>Consumables and Spare: <\/strong>Consumables are needed to carry smoothly the process of production. These materials do not directly enter production but they act as catalysts in production process. Spares also form a part of inventory. The Consumption pattern of raw materials, finished goods, consumables are different from that of spares. The policies of stocking of spares are different in different industries. Some industries like transport will need more spares than the other concerns.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>INVENTORY VALUATION<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">The main objective of valuation of inventories is the proper determination of income through the process of matching appropriate costs against revenues. Valuation of inventories assigns proper costs to inventory as well as goods sold. Inventories influence both the balance sheet and the statement of financial position. The inventories held by a business invariably have considerable value and a large amount of money is invested in these. Preparation of accurate income statement and balance sheet of a concern largely depends on correct valuation of its inventory. Valuation of inventories needed in order<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 To determine cost of goods sold for matching it against the sales for that period and to know gross profit.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 To determine the value of the stock in hand at the end of its financial period as stock is an important current asset in the statement of financial position.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>OBECTIVES OF INVENTORY VALUATION<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Inventory has to be properly valued because of the following reasons:<\/p>\n<p>&nbsp;<\/p>\n<p><strong>(1) Determination of profitability<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Inventory is an important item for determining the true profitability a business. Gross profit is determined by deducting the cost of goods sold from sales. Excess of sales over cost of goods sold is called gross profit. Cost of goods sold is ascertained by adjusting the opening and closing stocks to purchases, and it is shown as below:<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Cost of goods sold = Beginning Inventories + Purchases \u2013 Inventories at the end.<span style=\"text-align: initial;font-size: 1em\">It is clear from the above formula that that the values of inventories have important impact on the cost and the gross profit. Further, it also reveals that the undervaluation or overvaluation of inventories will seriously affect the profitability of the concern.<\/span><\/p>\n<\/div>\n<div>\n<p><strong>(ii) Ascertainment of financial position<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Inventory also plays an important role in the determination of the financial position of an enterprise. Closing stock or inventories at the end of a period are shown as a current asset in the balance sheet. In case the inventory is not properly valued, the balance sheet<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 will not disclose the correct financial position of the business<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 will give a misleading picture about the working capital position of the concern<\/p>\n<p>&nbsp;<\/p>\n<p><strong>SIGNIFICANCE OF INVENTORY VALUATION<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Inventory is important current assets of a business concern. It is widely affects efficiency of operations of an enterprise. Both, excess and shortage of inventory affect the productivity and the profitability of the concern. Inventory is an important barometer of business activity. The significance, of inventory valuation is explained below:<\/p>\n<p><strong>1. Lifeblood of the concern<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Inventory may be termed as &#8220;lifeblood&#8221; of the concern. An inventory enables<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 sale,<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 customer satisfaction,<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Productive work for company employees. Without inventory the business dies.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>2.\u00a0 <\/strong><strong>Impact on liquidity Position: <\/strong>Liquidity refers to firm\u201fs ability to pay its short term liabilities in time. The liquidity is generally measured through<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <strong>Net Working Capital: <\/strong>Inventory is important component of net working capital.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <strong>Current Ratio: <\/strong>Current ratio shows the relationship between current assets and current liabilities.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Thus, correct valuation of inventories is very much essential for a concern. If the valuation of inventories is not done accurately then this provide misleading information about liquidity position of the business.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>3. Effect on Income Statements<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">An accurate valuation is important as incorrect inventory valuation effects following in the Income statement<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Cost of goods sold<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Gross Profit<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Net Income<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 balance of retained earnings<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 If ending inventory overstated= cost of goods sold is understated= resulting in overstated gross profit and net income.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 If ending inventory understated= cost of goods sold is overstated= resulting in understated gross profit and net income.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 If opening inventory is overstated= cost of goods sold is overstated= resulting in understated gross profit and net income.<\/p>\n<\/div>\n<ul>\n<li style=\"text-align: justify\">If opening inventory is understated= cost of goods sold is understated= resulting in overstated gross profit and net income.<\/li>\n<\/ul>\n<ol start=\"4\">\n<li><strong>Effect on balance sheet<\/strong><\/li>\n<\/ol>\n<p style=\"text-align: justify\">Generally, inventory is the largest of the current assets of a business entity. Inventories are disclosed under the heading Current Assets on the balance sheet. An accurate valuation is important as incorrect inventory valuation effects following in the balance sheet<\/p>\n<ul>\n<li>Current Asset<\/li>\n<li>Working capital<\/li>\n<li>Total assets<\/li>\n<li>Retained earnings.<\/li>\n<\/ul>\n<p style=\"text-align: justify\">The balance sheet will not give a true and fair view of the affairs of the business. It is necessary to properly value ending inventory. Because overstatement of ending inventory causes<\/p>\n<ul>\n<li>current assets to be overstated<\/li>\n<li>total assets to be overstated<\/li>\n<li>Retained earnings to be overstated.<\/li>\n<\/ul>\n<ol start=\"5\">\n<li><strong>Effect two years statements<\/strong><\/li>\n<\/ol>\n<p style=\"text-align: justify\">\u00a0 \u00a0 \u00a0In fact, an incorrect inventory valuation will effect two years income statements, because inventory at the end of one accounting period will automatically become the inventory at the beginning in nest period. When a- company makes mistake in valuation its ending inventory in the current year, the company carries forward that erroneous ending inventory in the next year.<\/p>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-334 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-133.png\" alt=\"\" width=\"748\" height=\"404\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-133.png 748w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-133-300x162.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-133-65x35.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-133-225x122.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-133-350x189.png 350w\" sizes=\"auto, (max-width: 748px) 100vw, 748px\" \/><\/p>\n<p><strong>INVENTORY RECORD SYSTEMS<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">There are mainly two systems of determining the quantities and value of inventories sold and in hand. One system is termed as the periodic inventory system and the other is known as the perpetual inventory system. These are explained as below in detail:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-335 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-134.png\" alt=\"\" width=\"810\" height=\"341\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-134.png 810w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-134-300x126.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-134-768x323.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-134-65x27.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-134-225x95.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-134-350x147.png 350w\" sizes=\"auto, (max-width: 810px) 100vw, 810px\" \/><\/p>\n<p><strong>PERIODIC INVENTORY SYSTEM<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Periodic inventory system requires a physical verification or count of all the inventory items in hand at specific times. Because in periodic inventory system actual physical verification of stock is done the system is also called physical inventory system. In case of this system the quantity and value of inventory is determined only at the end of the accounting period after the physical verification or count of the units of inventory in hand. The periodic system relies heavily on physical count of the inventory to determine<\/p>\n<ul>\n<li>the ending inventory balance<\/li>\n<li>the cost of goods sold.<\/li>\n<\/ul>\n<p><strong>Calculation of cost of materials used<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>The cost of goods sold is determined as shown below<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-336 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-135.png\" alt=\"\" width=\"653\" height=\"488\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-135.png 653w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-135-300x224.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-135-65x49.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-135-225x168.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-135-350x262.png 350w\" sizes=\"auto, (max-width: 653px) 100vw, 653px\" \/><\/p>\n<p style=\"text-align: justify\">In periodic inventory system the physical counting is done for determination of value of inventor. On the basis of this counting all corrections are made to ensure the accuracy of the inventory figure shown in the accounts.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>(b) Less expensive<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Periodic inventory system is less expensive than the continuous inventory system.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>LIMITATIONS OF PERIODIC INVENTORY SYSTEM <\/strong>The following are the main drawbacks of this method:<\/p>\n<p>&nbsp;<\/p>\n<p><strong>(i) Based on wrong assumption<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Periodic inventory method is based on the assumption that all goods which are not recorded or found by physical inventory count have been either sold or used. Due to this assumption losses due to theft, waste, evaporation etc. are taken in the cost of the goods sold. Thus figure of cost of the goods sold may not be accurate.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>(ii) Adversely affect normal business operations<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">In this method physical counting is done at the end of accounting period due to this normal business operations will be adversely affected for a number of days. The businesses which are using this method have to stop their normal business operations and employ number of employees for the physical count and valuation of the inventory.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>(iii) Fail when income statements required frequently<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Periodic inventory method fails when income statements are required more frequently than once a year. In this case this method would become very expensive.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>(iv) Not providing information continuously<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Periodic inventory system does not provide the information regarding the quantity and value of materials in hand on a continuous basis.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>(v) No Recording for losses<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">In periodic inventory system no accounting is done for losses such as shrinkage, theft, and wastage.<\/p>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-337 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-136.png\" alt=\"\" width=\"779\" height=\"452\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-136.png 779w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-136-300x174.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-136-768x446.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-136-65x38.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-136-225x131.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-136-350x203.png 350w\" sizes=\"auto, (max-width: 779px) 100vw, 779px\" \/><\/p>\n<div>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <strong>According to the Chartered Institute of Management Accountants London<\/strong>: Perpetual Inventory System is a system of records maintained by the controlling department, which reflects the physical movement of stocks and their current balance.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <strong>According to the Wheldon<\/strong>: It is \u201ca method of recording inventory balances after every receipt and issue to facilitate regular checking and to obviate closing down for stocktaking.\u201d<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Perpetual Inventory System is also known as an Automatic Inventory System. In this system balance of raw materials, work-in-progress, and finished goods is provided on a continuing basis. The main aim of this system is to provide all times the information in detail about the quantity and value of stock. This maintains usual ledger accounts for each inventory item. The detailed inventory records for each different item (usually in both quantities and value.) must show:<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Receipts (Purchases);<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Issues (Sales),<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Balance on hand,<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">When goods-are purchased or sold, the inventories must be adjusted immediately.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>BENEFITS OF PERPETUAL INVENTORY SYSTEM <\/strong>The benefits of a perpetual inventory system may be noted as:<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Perpetual Inventory System is also known as an Automatic Inventory System.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>2. Continuing basis<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">In perpetual inventory system provides balance of raw materials, work-in-progress, and finished goods on a continuing basis.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>3. Information Available at any times<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">The basic objective of this system is to make available details about the quantity and value of stock of each item at all times.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>4. Provides a rigid control<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Perpetual inventory system helps in exercising a rigid control over stock of materials, as physical stock can be verified with the stock records.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>5.\u00a0 <\/strong><strong>No Interruption<\/strong>: The normal business operations are not interrupted by perpetual inventory system.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">6.\u00a0 <strong>No need for stock taking by actual count<\/strong>: Perpetual inventory system obviates the need for stock taking by actual physical count at the end of accounting period.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">7.\u00a0\u00a0 <strong>Suitable when volume of inventory items is large<\/strong>: Perpetual inventory system has to be applied when the volume of inventory items is very large and it is impossible to make a complete count.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>8.\u00a0 <\/strong><strong>No need of Special staff: <\/strong>In Perpetual inventory system special staff may be employed for stock taking.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>9.\u00a0\u00a0 <\/strong><strong>Controlling losses<\/strong>: Controlling losses is easier under a perpetual system because inventory records prepared under perpetual system continuously indicate the goods that must be on hand.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>10.\u00a0 <\/strong><strong>No out of stock situation<\/strong>: Perpetual inventory system continuously provides detail of goods that must be on hand. So, there will be no sudden out of stock situation.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>LIMITATIONS OF THE SYSTEM:<\/strong><\/p>\n<\/div>\n<p style=\"text-align: justify\">Perpetual inventory system is costly to maintain in those business firms which deal with numerous items of small value.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>PERPETUAL INVENTORY SYSTEM<\/strong><\/p>\n<ul>\n<li style=\"text-align: justify\">The perpetual system keeps continual track record of inventory balances.<\/li>\n<li style=\"text-align: justify\">Perpetual Inventory System is also known as an Automatic Inventory System.<\/li>\n<li style=\"text-align: justify\">In this system balance of raw materials, work-in-progress, and finished goods is provided on a continuing basis<\/li>\n<\/ul>\n<p><strong>BENEFITS OF PERPETUAL INVENTORY SYSTEM<\/strong><\/p>\n<ul>\n<li>Automatic Inventory System<\/li>\n<li>Continuing basis<\/li>\n<li>Provide information about stock at all times<\/li>\n<li>Provides a rigid control<\/li>\n<li>No Interruption in normal business operations<\/li>\n<li>No need for stock taking by actual count<\/li>\n<li>Suitable when volume of inventory items is large<\/li>\n<li>Special staff may not be employed<\/li>\n<li>Controlling losses<\/li>\n<li>Check on irregularities or changes in procedures by storekeepers<\/li>\n<li>No sudden \u201eout of stock situation<\/li>\n<\/ul>\n<p><strong>LIMITATIONS OF PERPETUAL INVENTORY SYSTEM<\/strong><\/p>\n<ul>\n<li>costly to maintain especially for those business firms which deal with numerous items of small value<\/li>\n<\/ul>\n<div>\n<p><strong>DIFFERENCE BETWEEN PERIODIC INVENTORY SYSTEM AND PERPETUAL INVENTORY SYSTEM<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>The following are the major differences between perpetual and periodic inventory system:<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Difference betwe<\/strong>en<strong> Periodic inventory system and perpetual inventory system<\/strong><\/p>\n<p>&nbsp;<\/p>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-338 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-137.png\" alt=\"\" width=\"733\" height=\"385\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-137.png 733w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-137-300x158.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-137-65x34.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-137-225x118.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-137-350x184.png 350w\" sizes=\"auto, (max-width: 733px) 100vw, 733px\" \/><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-339 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-138.png\" alt=\"\" width=\"410\" height=\"565\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-138.png 410w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-138-218x300.png 218w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-138-65x90.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-138-225x310.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-138-350x482.png 350w\" sizes=\"auto, (max-width: 410px) 100vw, 410px\" \/><\/p>\n<div>\n<p><strong>Conclusion: <\/strong>Following conclusion can be drawn from above<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Periodic Inventory System is less costly.<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Perpetual Inventory System but it gives more accurate information.<\/p>\n<\/div>\n<ul>\n<li style=\"text-align: justify\">The financial statements prepared quickly as the inventory records are maintained properly in the Perpetual Inventory System.<\/li>\n<li style=\"text-align: justify\">The Perpetual Inventory System is best suited for big enterprises.<\/li>\n<li style=\"text-align: justify\">Small enterprises can go for Periodic Inventory System.<\/li>\n<li style=\"text-align: justify\">Firm generally employs periodic inventory method for low unit selling price.<\/li>\n<\/ul>\n<p><strong>SUMMARY<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Inventories include goods purchased or manufactured by a concern and remain are unconsumed or unsold goods. Inventories influence both the balance sheet and the income statement. There are mainly two systems of determining the quantities and value of inventories sold and in hand. One is periodic inventory system and the other is known as the perpetual inventory system. The periodic system relies upon physical count of the inventory to determine the ending inventory balance and the cost of goods sold. Perpetual Inventory System is also known as an Automatic Inventory System. In this system balance of raw materials, work-in-progress, and finished goods is provided on a continuing basis. The Periodic Inventory System is less costly than the Perpetual Inventory System but it gives more accurate information.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>FEW SUGGESTED BOOKS TO LEARN MORE ABOUT INVENTORY VALAUTION<\/strong><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"text-align: justify\">Tulsian . P.C (2014) \u201cFinancial Accounting\u201d Pearson Education India.<\/li>\n<li style=\"text-align: justify\">Lal, Jawahar\u00a0 and\u00a0 Seema\u00a0 Srivastava\u00a0 (2004)\u00a0 \u201cFinancial\u00a0 Accounting\u201d\u00a0 S.Chand(G\/L) &amp; Company Ltd.<\/li>\n<li style=\"text-align: justify\">Goyal, V.K. and Ruchi Goyal (2012) \u201cFinancial Accounting\u201d PHI.<\/li>\n<li style=\"text-align: justify\">Maheshwari, S.N., Suneel K Maheshwari and Sharad K Maheshwari(2012) \u201cFinancial Accounting\u201d Vikas Publishing House Pvt Ltd<\/li>\n<li style=\"text-align: justify\">Raiyani Jagadish R International Financial Reporting Standards (IFRS) &amp; Indian Accounting Practices\u201d New Century Publications.<\/li>\n<li style=\"text-align: justify\">Patel, Chintan N. and Bhupendra Mantri (2015) \u201cIndian Accounting Standards (IND AS)\u201d Taxmann.<\/li>\n<li style=\"text-align: justify\">Monga, J.R. \u201cAvanced Financial Accounting\u201d Mayoor Paperbacks.<\/li>\n<li style=\"text-align: justify\">Bhattacharyya Ashis K., (2012)\u201d Essentials of Financial Accounting\u201d PHI.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><strong>POINTS TO PONDER<\/strong><\/p>\n<p>&nbsp;<\/p>\n<ol>\n<li><strong>MEANING OF INVENTORY<\/strong><\/li>\n<\/ol>\n<ul>\n<li>In trading concern. it may mean stock of finished goods only.<\/li>\n<li>In a manufacturing concern, it may include raw materials, work in process and stores, etc<\/li>\n<li>Preparation of accurate income statement and balance sheet of a concern depends on correct valuation of its inventory.<\/li>\n<\/ul>\n<ol start=\"2\">\n<li><strong>OBECTIVES OF INVENTORY VALUATION<\/strong><\/li>\n<\/ol>\n<ul>\n<li>Determination of profitability<\/li>\n<li>Ascertainment of financial position<\/li>\n<\/ul>\n<ol start=\"3\">\n<li><strong>SIGNIFICANCE OF INVENTORY VALUATION<\/strong><\/li>\n<\/ol>\n<ul>\n<li>Lifeblood of the concern<\/li>\n<li>Impact on liquidity Position \u00b7 Effect on Income Statements \u00b7 Effect on balance sheet<\/li>\n<li>Effect two years statements<\/li>\n<\/ul>\n<ol start=\"4\">\n<li><strong>PERIODIC INVENTORY SYSTEM<\/strong><\/li>\n<\/ol>\n<p>&nbsp;<\/p>\n<p>This system requires a physical verification or count of all the inventory items on hand at specific times. Because of actual physical verification of stock the system is also called physical inventory system.<\/p>\n<ol start=\"5\">\n<li><strong>BENEFITS OF PERIODIC INVENTORY SYSTEM<\/strong><\/li>\n<\/ol>\n<ul>\n<li>Ensure the accuracy of the accounts \u00b7 Less expensive<\/li>\n<\/ul>\n<ol start=\"6\">\n<li><strong>LIMITATIONS OF PERIODIC INVENTORY SYSTEM<\/strong><\/li>\n<\/ol>\n<ul>\n<li>Based on wrong assumption<\/li>\n<li>Adversely affect normal business operations<\/li>\n<li style=\"text-align: justify\">Becomes expensive when income statements are required more frequently \u00b7 Not provide the information on a continuous basis<\/li>\n<li>No accounting is for shrinkage, losses, theft, and wastage<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ol start=\"7\">\n<li><strong>BENEFITS OF PERPETUAL INVENTORY SYSTEM<\/strong><\/li>\n<\/ol>\n<ul>\n<li>Automatic Inventory System<\/li>\n<li>Continuing basis<\/li>\n<li>Provide information about stock at all times<\/li>\n<li>Provides a rigid control<\/li>\n<li>No Interruption in normal business operations<\/li>\n<li>No need for stock taking by actual count<\/li>\n<li>Suitable when volume of inventory items is large<\/li>\n<li>Special staff may not be employed<\/li>\n<li>Controlling losses<\/li>\n<li>Check on irregularities or changes in procedures by storekeepers<\/li>\n<li>No sudden \u201eout of stock situation<\/li>\n<\/ul>\n<table>\n<tbody>\n<tr>\n<td><strong>you can view video on Valuation of Inventories: Need and Methods<\/strong><\/td>\n<td><a href=\"https:\/\/youtu.be\/kQ0vDV_OHQI\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-120\" src=\"http:\/\/epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/2018\/11\/download.png\" alt=\"\" width=\"36\" height=\"36\" \/><\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n","protected":false},"author":3,"menu_order":37,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":["dr-sanjeet-sharma"],"pb_section_license":""},"chapter-type":[],"contributor":[62],"license":[],"class_list":["post-329","chapter","type-chapter","status-publish","hentry","contributor-dr-sanjeet-sharma"],"part":3,"_links":{"self":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/pressbooks\/v2\/chapters\/329","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/wp\/v2\/users\/3"}],"version-history":[{"count":7,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/pressbooks\/v2\/chapters\/329\/revisions"}],"predecessor-version":[{"id":498,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/pressbooks\/v2\/chapters\/329\/revisions\/498"}],"part":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/pressbooks\/v2\/parts\/3"}],"metadata":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/pressbooks\/v2\/chapters\/329\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/wp\/v2\/media?parent=329"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/pressbooks\/v2\/chapter-type?post=329"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/wp\/v2\/contributor?post=329"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/wp\/v2\/license?post=329"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}