{"id":341,"date":"2018-10-12T05:54:24","date_gmt":"2018-10-12T05:54:24","guid":{"rendered":"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/?post_type=chapter&#038;p=341"},"modified":"2019-01-10T08:39:03","modified_gmt":"2019-01-10T08:39:03","slug":"fifo-and-lifo-methods-of-valuation-of-inventory","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/chapter\/fifo-and-lifo-methods-of-valuation-of-inventory\/","title":{"rendered":"FIFO  and  LIFO  Methods  of  Valuation  of Inventory"},"content":{"raw":"<div><span style=\"float: right\"><a href=\"https:\/\/youtu.be\/Mue4GNuPIn0\" 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<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Understand the basis of Inventory Valuation<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Classification of methods of valuation of inventory<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Understand the Specific Identification Costs Method<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Understand the Meaning and Features of First-In-First-Out (FIFO) Method<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Explain the Meaning and Features of LIFO Method<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Discuss Weighted Average Price Method<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Compare different methods of valuation of inventory<\/p>\r\n&nbsp;\r\n\r\n<strong>INTRODUCTION<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Inventory is one of the most important assets possessed by a business. Preparation of accurate income statement and balance sheet of a concern depends on correct valuation of its inventory. There are different methods for assigning historical costs to inventory and goods sold. Choosing the correct inventory valuation method depends largely on the characteristics and need of the business.<\/p>\r\n&nbsp;\r\n\r\n<strong>BASIS OF VALUATION OF INVENTORIES<\/strong>\r\n\r\n<\/div>\r\nAccording to Accounting Standard 2 (Revised), the inventories should be valued at the lowest of \u201ccost\u201d and \u201cnet realisable value\u201d.\r\n\r\n<img class=\"size-full wp-image-344 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-139.png\" alt=\"\" width=\"1062\" height=\"299\" \/>\r\n\r\n<strong>Cost of Inventories<\/strong>\r\n<p style=\"text-align: justify\">Cost of inventories includes not only the price paid for acquisition of inventories but also all costs incurred for bringing and making them fit for use in production or for sale, e.g.,<\/p>\r\n\r\n<ul>\r\n \t<li>transportation costs,<\/li>\r\n \t<li>duties paid,<\/li>\r\n \t<li>insurance-in-transit,<\/li>\r\n \t<li>manufacturing expenses,<\/li>\r\n \t<li>wages paid or<\/li>\r\n \t<li>Manufacturing expenses incurred for converting raw materials into finished products, etc.<\/li>\r\n<\/ul>\r\nSimply it can be concluded that Cost of inventories is the aggregate of\r\n<ul>\r\n \t<li>cost of purchase,<\/li>\r\n \t<li>cost of conversion, and<\/li>\r\n \t<li style=\"text-align: justify\">Other costs incurred in bringing the inventories to their present location and condition.<\/li>\r\n<\/ul>\r\n&nbsp;\r\n\r\n<strong>Net realisable value<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.<\/p>\r\n&nbsp;\r\n\r\n<strong>METHODS OF VALUATION OF INVENTORIES<\/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. It requires assigning of proper costs to inventory as well as goods sold. Some of methods for assigning historical costs to inventory and goods sold are being given as below.<\/p>\r\n<img class=\"size-full wp-image-345 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-140.png\" alt=\"\" width=\"1099\" height=\"444\" \/>\r\n<ol>\r\n \t<li><strong> SPECIFIC IDENTIFICATION METHOD<\/strong><\/li>\r\n<\/ol>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Specific Identification Method is the simplest method used for valuation of inventories. Specific identification method is suitable in situations where it is possible to physically separate different purchases and each item sold and each item remaining in the inventory can be identified. The cost of specific items that are sold during a period is included for calculating the cost of goods sold for that period. Further, the cost of specific items remaining at the end of a period is included for calculating inventory at the end of that period. This method can be practiced in businesses such as car dealerships, jewelers, and art galleries<\/p>\r\n&nbsp;\r\n\r\nThis method can applied only\r\n\r\n&nbsp;\r\n<ul>\r\n \t<li>when a company knows the cost of every individual item that is sold,<\/li>\r\n \t<li>the quantity of inventory is limited and<\/li>\r\n \t<li>Each inventory item is unique.<\/li>\r\n<\/ul>\r\n&nbsp;\r\n\r\nThe working of the system can be understood with the help of the following illustration.\r\n\r\nIllustration1. The following is the record of receipts of certain materials during Jan, 2015:\r\n\r\n&nbsp;\r\n<ul>\r\n \t<li>Jan. 02 Received 800 units for Job No. 2 @ 10 per unit.<\/li>\r\n \t<li>Jan. 03 Received 600 units for Job No. 3 @ 11 per unit.<\/li>\r\n \t<li>Jan. 18 Received 400 units for Job No. 4 @ l2 per unit. During Jan. 2015, the following issues of materials are made:<\/li>\r\n \t<li>Jan.. 10 Issued 400 units to Job No. 2.<\/li>\r\n \t<li>Jan.. 14 Issued 200 units to Job No. 3.<\/li>\r\n \t<li>Jan.. 19 Issued 400 units to Job No. 2.<\/li>\r\n \t<li>Jan.. 20 Issued 400 units to Job No. 4.<\/li>\r\n<\/ul>\r\n<p style=\"text-align: justify\">Show how these transactions will appear in the Stores Ledger and state the amount of inventory of Jan. 31, 2015.<\/p>\r\n&nbsp;\r\n\r\n<img class=\"size-full wp-image-346 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-141.png\" alt=\"\" width=\"1035\" height=\"340\" \/>\r\n\r\n<strong>Suitability<\/strong>\r\n<ul>\r\n \t<li style=\"text-align: justify\">When the materials or goods have been purchased for a specific job or customer.<\/li>\r\n \t<li style=\"text-align: justify\">When a company is handling a small number of items.<\/li>\r\n<\/ul>\r\n&nbsp;\r\n\r\n<strong>ADVANTAGES OF SPECIFIC IDENTIFICATION METHOD<\/strong>:\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">In this method actual costs are matched against revenues. An important advantage of specific identification method that, in this method flow of cost is corresponding to the physical flow of inventory.<\/p>\r\n&nbsp;\r\n\r\n<strong>DISADVANTAGES OF SPECIFIC IDENTIFICATION METHOD<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">This method is inappropriate in most cases due to practical considerations. Some of the limitations of this method are as below<\/p>\r\n<p style=\"text-align: justify\">(i) <strong>Manipulation of Income<\/strong>: The biggest limitation of using this method is that it opens doors to income manipulation and the net income can be easily manipulated under this method.<\/p>\r\n<p style=\"text-align: justify\">(ii) <strong>Incase of number of inventory items<\/strong>: In case of a manufacturing concern have number of inventory items. Then, then this method will fail as it is almost impossible to identify the cost of each individual item of inventory.<\/p>\r\n\r\n<ol>\r\n \t<li><strong>FIRST IN FIRST OUT (FIFO) METHOD<\/strong><\/li>\r\n<\/ol>\r\n<p style=\"text-align: justify\">According to this method inventory is used\/ sold in the order they have been purchased and older inventory is issued first. It is based on the principle that cost should he charged to revenue in the order in which these have been incurred. Simply:<\/p>\r\n\r\n<ul>\r\n \t<li style=\"text-align: justify\">Goods or materials received first are issued first.<\/li>\r\n \t<li style=\"text-align: justify\">\u201eFirst come- first serve\u201f is the basis of issuing goods or materials.<\/li>\r\n<\/ul>\r\n<strong>Example of FIFO Method<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">The working of this method can be understood with the following illustration. The following are purchases of material during the month Jan. 2015:<\/p>\r\n\r\n<ul>\r\n \t<li style=\"text-align: justify\">Jan. 1, 2011 Opening Balance 1,000 units @ Rs 2<\/li>\r\n \t<li style=\"text-align: justify\">Jan. 6 Received from vendor 400 units @ Rs 3<\/li>\r\n \t<li style=\"text-align: justify\">Jan. 11 Received from vendor 300 units @ Rs 2<\/li>\r\n \t<li style=\"text-align: justify\">Jan. 20 Received from vendor 600 units @ \u201eRs 3<\/li>\r\n \t<li style=\"text-align: justify\">Jan. 26 Received from vendor 800 units @ \u201eRs 2 Issues of materials were as follows:<\/li>\r\n \t<li style=\"text-align: justify\">Jan. 5- 400 units,<\/li>\r\n \t<li>Jan 10 \u2013 800 units<\/li>\r\n \t<li>Jan.18- 200 units<\/li>\r\n<\/ul>\r\nPrepare store ledger accounts showing how the value of the issues would be recorded under FIFO method\r\n\r\n<img class=\"size-full wp-image-347 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-142.png\" alt=\"\" width=\"945\" height=\"480\" \/>\r\n\r\n<img class=\"size-full wp-image-348 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-143.png\" alt=\"\" width=\"853\" height=\"292\" \/>\r\n<div>\r\n\r\n<strong>FEATURES OF FIRST IN FIRST OUT (FIFO) METHOD<\/strong>\r\n\r\nSome of features of First In First out (FIFO) Method are explained as below\r\n\r\n&nbsp;\r\n\r\n<strong>1.\u00a0 <\/strong><strong>Assumption of method: <\/strong>Under this method, it is assumed that\r\n\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 the materials\/goods that are sold or used first are those are bought first. Or<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 the first inventory item that arrives is the first inventory item to go out. Or<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 the goods that arrive first are the first to be used. Or<\/p>\r\n\r\n<\/div>\r\n<div>\r\n<p style=\"text-align: justify\"><strong>2.\u00a0 <\/strong><strong>Value of Inventory: A<\/strong>ccording to FIFO method, inventory in hand will always be the most recently purchased items and valued at most recent or current prices.<\/p>\r\n<strong>\u00a0<\/strong>\r\n\r\n<strong>3.\u00a0 <\/strong><strong>Cost of goods sold<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">The cost of goods purchased first (first-in) is the cost of goods sold first (first-out). This means the cost of goods sold is taken on older prices.<\/p>\r\n&nbsp;\r\n\r\nThe FIFO method suitable in the following circumstances:\r\n\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 When nature of materials\/goods are perishable.\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Purchases are not made frequently.\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 When the prices in market show declining trend.\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Incase inventory items are bulky, slow moving and costly.\r\n<p style=\"text-align: justify\"><strong>5.\u00a0 <\/strong><strong>Impact of Fluctuations in Prices: <\/strong>These can be divided in to two parts<\/p>\r\n<strong>\u00a0<\/strong>\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of rising prices\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of falling prices\r\n\r\n<strong>In periods of rising prices<\/strong>: In periods of rising prices in FIFO method\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 inventory will be valued at a higher prices<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Cost of goods sold will also be relatively deflated.<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 profits will be inflated<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Increase in liability for payment of taxes.<\/p>\r\n<strong>In periods of falling prices<\/strong>: In periods of falling prices in FIFO method\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 inventory will be valued at a lower prices<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 resulting in deflating the profits,<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Reducing the income tax liability.<\/p>\r\n<strong>6.\u00a0 <\/strong><strong>Effect on Balance sheet and Income statement: <\/strong>These can be divided in to two parts\r\n\r\n<strong>\u00a0<\/strong>\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In normal circumstances\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Incase Fluctuation in Prices\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>In normal circumstances: <\/strong>In normal circumstances in FIFO method balance sheet shows a more correct and fair picture since the inventories at end is valued at the recent or current marked price.<\/p>\r\n&nbsp;\r\n\r\nThese can further be divided in to two parts:\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of rising price FIFO method gives<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of falling price FIFO method gives<\/p>\r\n&nbsp;\r\n\r\n<strong>In periods of falling price FIFO method gives<\/strong>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a more correct, fair and meaningful balance sheet<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a less realistic income statement.<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a less correct, fair and meaningful balance sheet<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a more realistic income statement.<\/p>\r\n&nbsp;\r\n\r\n<strong>ADVANTAGES OF FIFO METHOD:<\/strong>\r\n\r\nThe FIFO method has the following advantages\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>(i)\u00a0\u00a0\u00a0<\/strong><strong>Simple and Easy: <\/strong>FIFO method is easy to operate and it is easy to calculate value of inventory. Further, this method is also simple to understand.<\/p>\r\n\r\n<\/div>\r\n<div>\r\n<p style=\"text-align: justify\"><strong>(ii)\u00a0 \u00a0\u00a0<\/strong><strong>Realistic: <\/strong>FIFO method is realistic method as it is based on assumption that inventory is issued in the normal order they were received. Because it is logical that materials purchased earlier are used in earlier jobs.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(iii)\u00a0 \u00a0 \u00a0<\/strong><strong>Inventory at current prices: <\/strong>Under FIFO method value of inventory reflects actual price paid. Further, I under this method inventory valued at most recent prices.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(iv)\u00a0\u00a0\u00a0\u00a0<\/strong><strong>Reduces the risk<\/strong>: Under FIFO method inventory is issued in the normal order they were received. Thus, this method reduces the risk of inventory to become outdated or to perish.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(v)\u00a0\u00a0<\/strong><strong>Acceptable by tax authorities and IAS<\/strong>: This method of valuation of inventories also recommended and acceptable by tax authorities and IAS 2.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(vi)\u00a0\u00a0\u00a0\u00a0<\/strong><strong>No unrealized profit: <\/strong>FIFO method is based on cost. Therefore, no unrealized profit enters into the financial accounts of the company.<\/p>\r\n<strong>DISADVANTAGES OF FIFO METHOD:<\/strong>\r\n\r\nThe method suffers from the following disadvantages:\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>(i)\u00a0 \u00a0<\/strong><strong>Cost of goods of sold not on recent prices<\/strong>: In this method older items are issued, cost of production not reveal recent prices. Due to this price of products manufactured may not reflect current market prices.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(ii)\u00a0 \u00a0 \u00a0<\/strong><strong>Create problems incase of price fluctuation<\/strong>: Incase of prices fluctuate a lot this method becomes time consuming and calculation becomes complicated.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(iii)\u00a0 \u00a0\u00a0<\/strong><strong>Possibility of clerical errors<\/strong>: In this method calculations are complicated and due to this the possibility of clerical errors increases.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(iv)\u00a0 \u00a0<\/strong><strong>Difficult to make Comparison between jobs<\/strong>: In this method a job started a few minutes after another job may have totally different charge for materials. Thus, comparison between different jobs even using the same type of material becomes sometimes difficult.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(v)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong><strong>Higher tax liability <\/strong>In case of inflation, the value of cost of goods sold will be lowest and it will maximize net income and tax liability. Thus, this method results in a higher tax liability.<\/p>\r\n&nbsp;\r\n\r\n<strong>FIRST IN FIRST OUT (FIFO) METHOD<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">According to this method inventory is used\/ sold in the order they have been purchased and older inventory is issued first.<\/p>\r\n&nbsp;\r\n\r\n<strong>ADVANTAGES OF FIFO METHOD<\/strong>\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Simple and\u00a0 Easy\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Realistic\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Inventory current price\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Reduces the risk\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Acceptable by tax authorities and IAS\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 No unrealized profit\r\n\r\n<\/div>\r\n<strong>DISADVANTAGES OF FIFO METHOD<\/strong>\r\n<ul>\r\n \t<li>Cost of goods of sold not on recent prices<\/li>\r\n \t<li>Create problems incase of price fluctuation<\/li>\r\n \t<li>Possibility of clerical errors<\/li>\r\n \t<li>Difficult to make Comparison between jobs<\/li>\r\n \t<li>Higher tax liability .<\/li>\r\n<\/ul>\r\n<ol start=\"3\">\r\n \t<li><strong>LAST IN FIRST OUT (LIFO) METHOD<\/strong><\/li>\r\n<\/ol>\r\n<p style=\"text-align: justify\">Under LIFO method the newest inventory is recorded as sold or used first. According to this method the last items of materials\/goods purchased are the first to be issued\/sold.<\/p>\r\n&nbsp;\r\n\r\n<strong>Example of Last In First Out (LIFO) Method<\/strong>\r\n\r\n&nbsp;\r\n\r\nThe working of this method can be understood with the following illustration. The following are purchases of material during the month Jan. 2015:\r\n<ul>\r\n \t<li>Jan. 1, 2011 Opening Balance 1,000 units @ Rs 2<\/li>\r\n \t<li>Jan. 6 Received from vendor 400 units @ Rs 3<\/li>\r\n \t<li>Jan. 11 Received from vendor 300 units @ Rs 4<\/li>\r\n \t<li>Jan. 20 Received from vendor 600 units @ \u201eRs 3<\/li>\r\n \t<li style=\"text-align: justify\">Jan. 26 Received from vendor 800 units @ \u201eRs 2 Issues of materials were as follows:<\/li>\r\n \t<li>Jan. 5- 400 units,<\/li>\r\n \t<li>Jan 10 \u2013 800 units<\/li>\r\n \t<li>Jan.18- 200 units<\/li>\r\n<\/ul>\r\nPrepare store ledger accounts showing how the value of the issues would be recorded under LIFO method\r\n\r\n&nbsp;\r\n\r\n<strong>Store ledger accounts<\/strong>\r\n\r\n&nbsp;\r\n\r\n<img class=\"size-full wp-image-349 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-144.png\" alt=\"\" width=\"860\" height=\"255\" \/>\r\n<div>\r\n\r\n<strong>FEATURES OF LIFO METHOD<\/strong>\r\n\r\nSome of Features of LIFO Method are explained as below\r\n\r\n&nbsp;\r\n\r\n<strong>1.\u00a0 <\/strong><strong>Assumption of method: <\/strong>LIFO is based on the principle that\r\n\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 the last inventory goods received will be the first inventory goods sold or used.<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 arrive last are the first to be used.<\/p>\r\n&nbsp;\r\n\r\n<strong>2.\u00a0 <\/strong><strong>Value of Inventory<\/strong>\r\n<p style=\"text-align: justify\">When the LIFO method is used, the inventory at the end of a year consists of the goods placed in inventory at the beginning of the year. Thus, under this method, inventory valued at the earliest cost.<\/p>\r\n&nbsp;\r\n\r\n<strong>3.\u00a0 <\/strong><strong>In circumstances of Fluctuations in Prices: <\/strong>These can be divided in to two parts\r\n\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of rising prices<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of falling prices<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 result in the lowest ending inventory,<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 highest cost of goods sold,<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Lowest net income.<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Reduction in liability for payment of taxes.\r\n<p style=\"text-align: justify\"><strong>In periods of falling prices<\/strong>: In periods of falling prices, LIFO method will result in<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 inventory will be valued at a higher prices\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 resulting in increase the profits,\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Increasing the income tax liability.\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>4.\u00a0 <\/strong><strong>Effect on Balance sheet and Income statement <\/strong>These can be divided in to two parts<\/p>\r\n<strong>\u00a0<\/strong>\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In normal circumstances\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Incase Fluctuation in Prices\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>In normal circumstances: <\/strong>In normal circumstances when this method is used balance sheet shows a distorted picture since the inventory at end is shown at old costs <strong>Incase Fluctuation in Prices: <\/strong>These can further be divided in to two parts:<\/p>\r\n&nbsp;\r\n\r\n<strong>In periods of rising price LIFO method gives<\/strong>\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a more meaningful, true and fair view of balance sheet\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a less realistic income statement.\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a less meaningful balance sheet\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a more realistic income statement.\r\n\r\n&nbsp;\r\n\r\n<strong>ADVANTAGES OF LIFO METHOD:<\/strong>\r\n\r\n<\/div>\r\n<strong>\u00a0<\/strong>\r\n\r\nThe method has the following advantages:\r\n<ul>\r\n \t<li style=\"text-align: justify\"><strong>(i) <\/strong><strong>Valuation of issues at current prices: <\/strong>Under LIFO method current market prices are used for valuing materials issued to different jobs or calculating the cost of goods sold.<\/li>\r\n<\/ul>\r\n<ul>\r\n \t<li style=\"text-align: justify\"><strong>(ii) <\/strong><strong>No unrealized profit or loss<\/strong>: LIFO method is based on cost and no unrealized profit or loss recorded under this method.<\/li>\r\n \t<li style=\"text-align: justify\"><strong>(iii) <\/strong><strong>Suitability <\/strong>LIFO method is suitable for materials non-perishable type.<\/li>\r\n \t<li style=\"text-align: justify\"><strong>(iv) <\/strong><strong>Lower a business's tax liability: <\/strong>When LIFO method used in the times of growing inflation it can reduce a company\u201fs tax responsibility.<\/li>\r\n<\/ul>\r\n&nbsp;\r\n\r\n<strong>DISADVANTAGES OF LIFO METHOD:<\/strong>\r\n\r\nThe method suffers from the following disadvantages:\r\n<ul>\r\n \t<li style=\"text-align: justify\"><strong>(i) <\/strong><strong>Not appropriate for some businesses: <\/strong>This method is not appropriate for businesses with perishable inventory items because those businesses have to sell the oldest inventory items first.<\/li>\r\n \t<li style=\"text-align: justify\"><strong>(ii) <\/strong><strong>Create obsolete inventory: <\/strong>LIFO can incur obsolete inventory. This is because older inventory will remain on the shelves and may become obsolete over time.<\/li>\r\n \t<li style=\"text-align: justify\"><strong>(iii) <\/strong><strong>IFRS prohibit the use of LIFO: <\/strong>Finally, International Financial Reporting Standards not recommend the use of LIFO and it has been heavily regulated under the International Financial Reporting Standards<\/li>\r\n<\/ul>\r\n<strong>LAST IN FIRST OUT (LIFO) METHOD<\/strong>\r\n<ul>\r\n \t<li style=\"text-align: justify\">Under LIFO method the newest inventory is recorded as sold or used first.<\/li>\r\n<\/ul>\r\n<strong>ADVANTAGES OF LIFO METHOD<\/strong>\r\n<ul>\r\n \t<li>Lower a business's tax liability<\/li>\r\n \t<li>Valuation of issues at current prices<\/li>\r\n \t<li>No unrealized profit or loss<\/li>\r\n \t<li>Not appropriate for some businesses<\/li>\r\n \t<li>Create obsolete inventory<\/li>\r\n \t<li>IFRS prohibit the use of LIFO<\/li>\r\n<\/ul>\r\n<img class=\"alignnone size-full wp-image-350\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-145.png\" alt=\"\" width=\"968\" height=\"389\" \/>\r\n\r\n<img class=\"size-full wp-image-351 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-146.png\" alt=\"\" width=\"944\" height=\"487\" \/>\r\n<div>\r\n\r\n<strong>4. WEIGHTED AVERAGE PRICE METHOD<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Weighted Average Price Method is based on the assumption that materials or goods which are purchased are combined into a common bin, after that they lose their separate identity. The inventory does not consist of specific batch of goods. The inventory is thus priced on the basis of Weighted Average prices. These are weighted according to the quantity purchased at each price. Weighted Average cost is calculated given as below:<\/p>\r\n\r\n<table style=\"height: 114px\" border=\"1\">\r\n<tbody>\r\n<tr style=\"height: 43px\">\r\n<td style=\"height: 43px;width: 169.063px\">Average cost =<\/td>\r\n<td style=\"height: 43px;width: 627.063px\">value of inventory at beginning of year + purchases during the year<\/td>\r\n<\/tr>\r\n<tr style=\"height: 28px\">\r\n<td style=\"height: 28px;width: 169.063px\"><\/td>\r\n<td>Number of units at the beginnning of year + number of units purchased during year<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n<strong>Example of Weighted Average Price Method:<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">The working of this method can be understood with the following illustration. The working of this method can be understood with the following illustration. The following are purchases of material during the month Jan. 2015:<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan. 1, 2011 Opening Balance 1,000 units @ Rs 2\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan. 6 Received from vendor 400 units @ Rs 3\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan. 11 Received from vendor 300 units @ Rs 2 Issues of materials were as follows:\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan. 5- 400 units,\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan 10 \u2013 800 units\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan.18- 200 units\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">Prepare store ledger accounts showing how the value of the issues would be recorded under LIFO method<\/p>\r\n&nbsp;\r\n\r\n<strong>Store ledger Account<\/strong>\r\n\r\n<\/div>\r\n&nbsp;\r\n<div>\r\n\r\n<img class=\"size-full wp-image-352 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-147.png\" alt=\"\" width=\"679\" height=\"230\" \/>\r\n\r\n<strong>ADVANTAGES OF WEIGHTED AVERAGE PRICE METHOD:<\/strong>\r\n<p style=\"text-align: justify\">The main advantages of this method are as below:<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>(i)\u00a0 \u00a0 \u00a0<\/strong><strong>Logical<\/strong>: Weighted Average Price Method logically recognizes that identical items of inventory, even purchased at different intervals, have equal value.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(ii)\u00a0 \u00a0<\/strong><strong>Minimizes fluctuations and ease the pricing process<\/strong>: Weighted Average Price Method minimizes fluctuations in costs of materials issued. Further, it eases the pricing process.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(iii)\u00a0 \u00a0<\/strong><strong>Smoothes out fluctuations in profits<\/strong>: Weighted Average Price Method smoothes out fluctuations in profits that have occurred due to price fluctuations.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(iv)\u00a0 \u00a0\u00a0<\/strong><strong>Computerized system can be applied<\/strong>: Weighted Average Price Method is easier to be computerized than other methods of valuation of inventories.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(v)\u00a0 \u00a0 \u00a0<\/strong><strong>Acceptable by tax authorities and IAS<\/strong>: This method of valuation of inventories also recommended and acceptable by tax authorities and IAS 2.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(vi)\u00a0\u00a0<\/strong><strong>Popular method<\/strong>: Weighted Average Price Method is very popular on account of its being based on the total quantity and value of materials purchased.<\/p>\r\n&nbsp;\r\n\r\n<strong>DISADVANTAGES OF WEIGHTED AVERAGE PRICE METHOD:<\/strong>\r\n<p style=\"text-align: justify\">Some of the limitations of this method are given as below:<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\"><strong>(i)\u00a0\u00a0<\/strong><strong>Does not reflect actual price<\/strong>: Weighted Average Price Method does not reflect actual price paid for as it based on average price. Therefore, it values inventory at average prices not on actual prices.<\/p>\r\n<strong>\u00a0<\/strong>\r\n<p style=\"text-align: justify\"><strong>(ii)\u00a0 \u00a0<\/strong><strong>Rounding off create problems<\/strong>: Calculations in Weighted Average Price Method results in figures with several decimal places. Rounding off results in slightly inaccurate figures.<\/p>\r\n<strong>\u00a0<\/strong>\r\n\r\n<strong>(iii)\u00a0 \u00a0<\/strong><strong>Not suitable<\/strong>: In period of rising prices, Weighted Average Price Method does not reflect current prices.\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n<strong>WEIGHTED AVERAGE PRICE METHOD<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7 Weighted Average Price Method is based on the assumption that materials or goods which are purchased are combined into a common bin, after that they lose their separate identity.<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0 \u00a0 Inventory is thus priced on the basis of Weighted Average prices.\r\n\r\n&nbsp;\r\n\r\n<strong>ADVANTAGES OF WEIGHTED AVERAGE PRICE METHOD:<\/strong>\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Logical\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Minimizes fluctuations and ease the pricing process\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Smoothes out fluctuations in profits\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Computerized system can be applied\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Acceptable by tax authorities and IAS\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Popular method\r\n\r\n<\/div>\r\n&nbsp;\r\n<div>\r\n\r\n<strong>DISADVANTAGES OF WEIGHTED AVERAGE PRICE METHOD<\/strong>\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Does not reflect actual price\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Rounding off create problems\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Not suitable\r\n\r\n&nbsp;\r\n\r\n<strong>COMPARISON OF FIFO AND WEIGHTED AVERAGE PRICE METHOD<\/strong>\r\n\r\nFIFO\u00a0 and\u00a0 Weighted\u00a0 Average\u00a0 Price\u00a0 Method\u00a0 provide\u00a0 different\u00a0 results\u00a0 in\u00a0 different\r\n\r\n&nbsp;\r\n\r\ncircumstances and some of these are explained below in table:\r\n<table class=\"aligncenter\" border=\"1\">\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 231.063px\"><strong>Situation<\/strong><\/td>\r\n<td style=\"width: 47.0625px\"><strong>FIFO<\/strong><\/td>\r\n<td style=\"width: 164.063px\"><strong>Weighted Average Price<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 231.063px\"><\/td>\r\n<td style=\"width: 47.0625px\"><\/td>\r\n<td style=\"width: 164.063px\"><strong>Method<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 231.063px\"><strong>If prices are showing rising trend<\/strong><\/td>\r\n<td style=\"width: 47.0625px\"><\/td>\r\n<td style=\"width: 164.063px\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 231.063px\">Value of inventory at the end<\/td>\r\n<td style=\"width: 47.0625px\">Higher<\/td>\r\n<td style=\"width: 164.063px\">Lower<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 231.063px\">Net Income<\/td>\r\n<td style=\"width: 47.0625px\">Higher<\/td>\r\n<td style=\"width: 164.063px\">Lower<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 231.063px\">Valuation of Assets<\/td>\r\n<td style=\"width: 47.0625px\">Higher<\/td>\r\n<td style=\"width: 164.063px\">Lower<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 231.063px\"><strong>If prices are showing rising trend<\/strong><\/td>\r\n<td style=\"width: 47.0625px\"><\/td>\r\n<td style=\"width: 164.063px\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 231.063px\">Value of inventory at the end<\/td>\r\n<td style=\"width: 47.0625px\">Lower<\/td>\r\n<td style=\"width: 164.063px\">Higher<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 231.063px\">Net Income<\/td>\r\n<td style=\"width: 47.0625px\">Lower<\/td>\r\n<td style=\"width: 164.063px\">Higher<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 231.063px\">Valuation of Assets<\/td>\r\n<td style=\"width: 47.0625px\">Lower<\/td>\r\n<td style=\"width: 164.063px\">Higher<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<strong>SELECTION OF BEST METHODS<\/strong>\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">There are several methods to value and cost inventory. Inventories represent important current assets of a concern. Selection of the right inventory valuation method depends on the specific characteristics and objectives of the valuation. Below are the recommendations of Indian accounting standard and International Financial Reporting Standard about selection of valuation method of inventory.<\/p>\r\n&nbsp;\r\n\r\n<strong>Recommendation from Accounting Standard 2 (Revised)<\/strong>\r\n\r\nAccounting Standard 2 (Revised) provides\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 First in First out (FIFO) or Weighted Average method for computing the cost of inventories.<\/p>\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 It has recommended the use of specific Identification Method only in case of goods or services which are meant for specific projects.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">Under IFRS, entities are permitted to employ one of three cost formulas when reporting inventory expense. These methods are:<\/p>\r\n&nbsp;\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Specific Identification\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 First-in, First-out (\"FIFO\")\r\n\r\n\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Weighted-Average Cost\r\n\r\n&nbsp;\r\n<p style=\"text-align: justify\">So, it can be concluded that generally FIFO and Weighted Average method are popular and recommended methods.<\/p>\r\n&nbsp;\r\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Generally FIFO and Weighted Average method are popular and recommended methods.<\/p>\r\n&nbsp;\r\n\r\n<strong>SUMMARY<\/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. According to Accounting Standard 2 (Revised), the\u00a0<span style=\"text-align: initial;font-size: 1em\">inventories should be valued at the lowest of \u201ccost\u201d and \u201cnet realisable value\u201d. There are different methods for assigning historical costs to inventory and goods sold. These mainly include Specific Identification Method, FIFO,LIFO and Weighted Average Price Method. Generally FIFO and Weighted Average method are popular and recommended methods.<\/span><\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>you can view video on FIFO and LIFO Methods of Valuation of Inventory<\/strong><\/td>\r\n<td><a href=\"https:\/\/youtu.be\/Mue4GNuPIn0\" 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>\r\n<\/div>\r\n<div>\r\n\r\n<strong>SUGGESTED READINGS<\/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\">\u00a0Lal,\u00a0 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\">\u00a0Goyal, V.K. and Ruchi Goyal (2012) \u201cFinancial Accounting\u201d PHI.<\/li>\r\n \t<li style=\"text-align: justify\">\u00a0 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\">\u00a0 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\">\u00a0Patel, Chintan N. and Bhupendra Mantri (2015) \u201cIndian Accounting Standards (IND AS)\u201d Taxmann.<\/li>\r\n \t<li style=\"text-align: justify\">\u00a0 Monga, J.R. \u201cAvanced Financial Accounting\u201d Mayoor Paperbacks.<\/li>\r\n \t<li style=\"text-align: justify\">\u00a0 \u00a0 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<ul>\r\n \t<li style=\"text-align: justify\">\u00a0Specific identification method is suitable in situations where it is possible to physically separate different purchases a each item sold and each item remaining in the inventory can be identified.<\/li>\r\n \t<li style=\"text-align: justify\">\u00a0According to FIRST IN FIRST OUT (FIFO) METHOD inventory is used\/ sold in the order they have been purchased and older inventory is issued first.<\/li>\r\n \t<li style=\"text-align: justify\">Under LIFO method the newest inventory is recorded as sold or used first.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<ul>\r\n \t<li style=\"text-align: justify\">Weighted Average Price Method is based on the assumption that materials or goods which are purchased are combined into a common bin, after that they lose their separate identity.<\/li>\r\n \t<li style=\"text-align: justify\">Inventory is thus priced on the basis of Weighted Average prices.<\/li>\r\n \t<li style=\"text-align: justify\">Generally FIFO and Weighted Average method are popular and recommended methods.<\/li>\r\n<\/ul>","rendered":"<div><span style=\"float: right\"><a href=\"https:\/\/youtu.be\/Mue4GNuPIn0\" 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 style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Understand the basis of Inventory Valuation<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Classification of methods of valuation of inventory<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Understand the Specific Identification Costs Method<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Understand the Meaning and Features of First-In-First-Out (FIFO) Method<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Explain the Meaning and Features of LIFO Method<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Discuss Weighted Average Price Method<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Compare different methods of valuation of inventory<\/p>\n<p>&nbsp;<\/p>\n<p><strong>INTRODUCTION<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Inventory is one of the most important assets possessed by a business. Preparation of accurate income statement and balance sheet of a concern depends on correct valuation of its inventory. There are different methods for assigning historical costs to inventory and goods sold. Choosing the correct inventory valuation method depends largely on the characteristics and need of the business.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>BASIS OF VALUATION OF INVENTORIES<\/strong><\/p>\n<\/div>\n<p>According to Accounting Standard 2 (Revised), the inventories should be valued at the lowest of \u201ccost\u201d and \u201cnet realisable value\u201d.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-344 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-139.png\" alt=\"\" width=\"1062\" height=\"299\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-139.png 1062w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-139-300x84.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-139-768x216.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-139-1024x288.png 1024w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-139-65x18.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-139-225x63.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-139-350x99.png 350w\" sizes=\"auto, (max-width: 1062px) 100vw, 1062px\" \/><\/p>\n<p><strong>Cost of Inventories<\/strong><\/p>\n<p style=\"text-align: justify\">Cost of inventories includes not only the price paid for acquisition of inventories but also all costs incurred for bringing and making them fit for use in production or for sale, e.g.,<\/p>\n<ul>\n<li>transportation costs,<\/li>\n<li>duties paid,<\/li>\n<li>insurance-in-transit,<\/li>\n<li>manufacturing expenses,<\/li>\n<li>wages paid or<\/li>\n<li>Manufacturing expenses incurred for converting raw materials into finished products, etc.<\/li>\n<\/ul>\n<p>Simply it can be concluded that Cost of inventories is the aggregate of<\/p>\n<ul>\n<li>cost of purchase,<\/li>\n<li>cost of conversion, and<\/li>\n<li style=\"text-align: justify\">Other costs incurred in bringing the inventories to their present location and condition.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><strong>Net realisable value<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>METHODS OF VALUATION OF INVENTORIES<\/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. It requires assigning of proper costs to inventory as well as goods sold. Some of methods for assigning historical costs to inventory and goods sold are being given as below.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-345 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-140.png\" alt=\"\" width=\"1099\" height=\"444\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-140.png 1099w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-140-300x121.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-140-768x310.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-140-1024x414.png 1024w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-140-65x26.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-140-225x91.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-140-350x141.png 350w\" sizes=\"auto, (max-width: 1099px) 100vw, 1099px\" \/><\/p>\n<ol>\n<li><strong> SPECIFIC IDENTIFICATION METHOD<\/strong><\/li>\n<\/ol>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Specific Identification Method is the simplest method used for valuation of inventories. Specific identification method is suitable in situations where it is possible to physically separate different purchases and each item sold and each item remaining in the inventory can be identified. The cost of specific items that are sold during a period is included for calculating the cost of goods sold for that period. Further, the cost of specific items remaining at the end of a period is included for calculating inventory at the end of that period. This method can be practiced in businesses such as car dealerships, jewelers, and art galleries<\/p>\n<p>&nbsp;<\/p>\n<p>This method can applied only<\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>when a company knows the cost of every individual item that is sold,<\/li>\n<li>the quantity of inventory is limited and<\/li>\n<li>Each inventory item is unique.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p>The working of the system can be understood with the help of the following illustration.<\/p>\n<p>Illustration1. The following is the record of receipts of certain materials during Jan, 2015:<\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>Jan. 02 Received 800 units for Job No. 2 @ 10 per unit.<\/li>\n<li>Jan. 03 Received 600 units for Job No. 3 @ 11 per unit.<\/li>\n<li>Jan. 18 Received 400 units for Job No. 4 @ l2 per unit. During Jan. 2015, the following issues of materials are made:<\/li>\n<li>Jan.. 10 Issued 400 units to Job No. 2.<\/li>\n<li>Jan.. 14 Issued 200 units to Job No. 3.<\/li>\n<li>Jan.. 19 Issued 400 units to Job No. 2.<\/li>\n<li>Jan.. 20 Issued 400 units to Job No. 4.<\/li>\n<\/ul>\n<p style=\"text-align: justify\">Show how these transactions will appear in the Stores Ledger and state the amount of inventory of Jan. 31, 2015.<\/p>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-346 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-141.png\" alt=\"\" width=\"1035\" height=\"340\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-141.png 1035w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-141-300x99.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-141-768x252.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-141-1024x336.png 1024w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-141-65x21.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-141-225x74.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-141-350x115.png 350w\" sizes=\"auto, (max-width: 1035px) 100vw, 1035px\" \/><\/p>\n<p><strong>Suitability<\/strong><\/p>\n<ul>\n<li style=\"text-align: justify\">When the materials or goods have been purchased for a specific job or customer.<\/li>\n<li style=\"text-align: justify\">When a company is handling a small number of items.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><strong>ADVANTAGES OF SPECIFIC IDENTIFICATION METHOD<\/strong>:<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">In this method actual costs are matched against revenues. An important advantage of specific identification method that, in this method flow of cost is corresponding to the physical flow of inventory.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>DISADVANTAGES OF SPECIFIC IDENTIFICATION METHOD<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">This method is inappropriate in most cases due to practical considerations. Some of the limitations of this method are as below<\/p>\n<p style=\"text-align: justify\">(i) <strong>Manipulation of Income<\/strong>: The biggest limitation of using this method is that it opens doors to income manipulation and the net income can be easily manipulated under this method.<\/p>\n<p style=\"text-align: justify\">(ii) <strong>Incase of number of inventory items<\/strong>: In case of a manufacturing concern have number of inventory items. Then, then this method will fail as it is almost impossible to identify the cost of each individual item of inventory.<\/p>\n<ol>\n<li><strong>FIRST IN FIRST OUT (FIFO) METHOD<\/strong><\/li>\n<\/ol>\n<p style=\"text-align: justify\">According to this method inventory is used\/ sold in the order they have been purchased and older inventory is issued first. It is based on the principle that cost should he charged to revenue in the order in which these have been incurred. Simply:<\/p>\n<ul>\n<li style=\"text-align: justify\">Goods or materials received first are issued first.<\/li>\n<li style=\"text-align: justify\">\u201eFirst come- first serve\u201f is the basis of issuing goods or materials.<\/li>\n<\/ul>\n<p><strong>Example of FIFO Method<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">The working of this method can be understood with the following illustration. The following are purchases of material during the month Jan. 2015:<\/p>\n<ul>\n<li style=\"text-align: justify\">Jan. 1, 2011 Opening Balance 1,000 units @ Rs 2<\/li>\n<li style=\"text-align: justify\">Jan. 6 Received from vendor 400 units @ Rs 3<\/li>\n<li style=\"text-align: justify\">Jan. 11 Received from vendor 300 units @ Rs 2<\/li>\n<li style=\"text-align: justify\">Jan. 20 Received from vendor 600 units @ \u201eRs 3<\/li>\n<li style=\"text-align: justify\">Jan. 26 Received from vendor 800 units @ \u201eRs 2 Issues of materials were as follows:<\/li>\n<li style=\"text-align: justify\">Jan. 5- 400 units,<\/li>\n<li>Jan 10 \u2013 800 units<\/li>\n<li>Jan.18- 200 units<\/li>\n<\/ul>\n<p>Prepare store ledger accounts showing how the value of the issues would be recorded under FIFO method<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-347 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-142.png\" alt=\"\" width=\"945\" height=\"480\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-142.png 945w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-142-300x152.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-142-768x390.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-142-65x33.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-142-225x114.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-142-350x178.png 350w\" sizes=\"auto, (max-width: 945px) 100vw, 945px\" \/><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-348 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-143.png\" alt=\"\" width=\"853\" height=\"292\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-143.png 853w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-143-300x103.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-143-768x263.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-143-65x22.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-143-225x77.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-143-350x120.png 350w\" sizes=\"auto, (max-width: 853px) 100vw, 853px\" \/><\/p>\n<div>\n<p><strong>FEATURES OF FIRST IN FIRST OUT (FIFO) METHOD<\/strong><\/p>\n<p>Some of features of First In First out (FIFO) Method are explained as below<\/p>\n<p>&nbsp;<\/p>\n<p><strong>1.\u00a0 <\/strong><strong>Assumption of method: <\/strong>Under this method, it is assumed that<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 the materials\/goods that are sold or used first are those are bought first. Or<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 the first inventory item that arrives is the first inventory item to go out. Or<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 the goods that arrive first are the first to be used. Or<\/p>\n<\/div>\n<div>\n<p style=\"text-align: justify\"><strong>2.\u00a0 <\/strong><strong>Value of Inventory: A<\/strong>ccording to FIFO method, inventory in hand will always be the most recently purchased items and valued at most recent or current prices.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p><strong>3.\u00a0 <\/strong><strong>Cost of goods sold<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">The cost of goods purchased first (first-in) is the cost of goods sold first (first-out). This means the cost of goods sold is taken on older prices.<\/p>\n<p>&nbsp;<\/p>\n<p>The FIFO method suitable in the following circumstances:<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 When nature of materials\/goods are perishable.<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Purchases are not made frequently.<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 When the prices in market show declining trend.<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Incase inventory items are bulky, slow moving and costly.<\/p>\n<p style=\"text-align: justify\"><strong>5.\u00a0 <\/strong><strong>Impact of Fluctuations in Prices: <\/strong>These can be divided in to two parts<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of rising prices<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of falling prices<\/p>\n<p><strong>In periods of rising prices<\/strong>: In periods of rising prices in FIFO method<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 inventory will be valued at a higher prices<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Cost of goods sold will also be relatively deflated.<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 profits will be inflated<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Increase in liability for payment of taxes.<\/p>\n<p><strong>In periods of falling prices<\/strong>: In periods of falling prices in FIFO method<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 inventory will be valued at a lower prices<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 resulting in deflating the profits,<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Reducing the income tax liability.<\/p>\n<p><strong>6.\u00a0 <\/strong><strong>Effect on Balance sheet and Income statement: <\/strong>These can be divided in to two parts<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In normal circumstances<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Incase Fluctuation in Prices<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>In normal circumstances: <\/strong>In normal circumstances in FIFO method balance sheet shows a more correct and fair picture since the inventories at end is valued at the recent or current marked price.<\/p>\n<p>&nbsp;<\/p>\n<p>These can further be divided in to two parts:<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of rising price FIFO method gives<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of falling price FIFO method gives<\/p>\n<p>&nbsp;<\/p>\n<p><strong>In periods of falling price FIFO method gives<\/strong><\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a more correct, fair and meaningful balance sheet<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a less realistic income statement.<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a less correct, fair and meaningful balance sheet<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a more realistic income statement.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>ADVANTAGES OF FIFO METHOD:<\/strong><\/p>\n<p>The FIFO method has the following advantages<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>(i)\u00a0\u00a0\u00a0<\/strong><strong>Simple and Easy: <\/strong>FIFO method is easy to operate and it is easy to calculate value of inventory. Further, this method is also simple to understand.<\/p>\n<\/div>\n<div>\n<p style=\"text-align: justify\"><strong>(ii)\u00a0 \u00a0\u00a0<\/strong><strong>Realistic: <\/strong>FIFO method is realistic method as it is based on assumption that inventory is issued in the normal order they were received. Because it is logical that materials purchased earlier are used in earlier jobs.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(iii)\u00a0 \u00a0 \u00a0<\/strong><strong>Inventory at current prices: <\/strong>Under FIFO method value of inventory reflects actual price paid. Further, I under this method inventory valued at most recent prices.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(iv)\u00a0\u00a0\u00a0\u00a0<\/strong><strong>Reduces the risk<\/strong>: Under FIFO method inventory is issued in the normal order they were received. Thus, this method reduces the risk of inventory to become outdated or to perish.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(v)\u00a0\u00a0<\/strong><strong>Acceptable by tax authorities and IAS<\/strong>: This method of valuation of inventories also recommended and acceptable by tax authorities and IAS 2.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(vi)\u00a0\u00a0\u00a0\u00a0<\/strong><strong>No unrealized profit: <\/strong>FIFO method is based on cost. Therefore, no unrealized profit enters into the financial accounts of the company.<\/p>\n<p><strong>DISADVANTAGES OF FIFO METHOD:<\/strong><\/p>\n<p>The method suffers from the following disadvantages:<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>(i)\u00a0 \u00a0<\/strong><strong>Cost of goods of sold not on recent prices<\/strong>: In this method older items are issued, cost of production not reveal recent prices. Due to this price of products manufactured may not reflect current market prices.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(ii)\u00a0 \u00a0 \u00a0<\/strong><strong>Create problems incase of price fluctuation<\/strong>: Incase of prices fluctuate a lot this method becomes time consuming and calculation becomes complicated.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(iii)\u00a0 \u00a0\u00a0<\/strong><strong>Possibility of clerical errors<\/strong>: In this method calculations are complicated and due to this the possibility of clerical errors increases.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(iv)\u00a0 \u00a0<\/strong><strong>Difficult to make Comparison between jobs<\/strong>: In this method a job started a few minutes after another job may have totally different charge for materials. Thus, comparison between different jobs even using the same type of material becomes sometimes difficult.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(v)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong><strong>Higher tax liability <\/strong>In case of inflation, the value of cost of goods sold will be lowest and it will maximize net income and tax liability. Thus, this method results in a higher tax liability.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>FIRST IN FIRST OUT (FIFO) METHOD<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">According to this method inventory is used\/ sold in the order they have been purchased and older inventory is issued first.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>ADVANTAGES OF FIFO METHOD<\/strong><\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Simple and\u00a0 Easy<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Realistic<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Inventory current price<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Reduces the risk<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Acceptable by tax authorities and IAS<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 No unrealized profit<\/p>\n<\/div>\n<p><strong>DISADVANTAGES OF FIFO METHOD<\/strong><\/p>\n<ul>\n<li>Cost of goods of sold not on recent prices<\/li>\n<li>Create problems incase of price fluctuation<\/li>\n<li>Possibility of clerical errors<\/li>\n<li>Difficult to make Comparison between jobs<\/li>\n<li>Higher tax liability .<\/li>\n<\/ul>\n<ol start=\"3\">\n<li><strong>LAST IN FIRST OUT (LIFO) METHOD<\/strong><\/li>\n<\/ol>\n<p style=\"text-align: justify\">Under LIFO method the newest inventory is recorded as sold or used first. According to this method the last items of materials\/goods purchased are the first to be issued\/sold.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Example of Last In First Out (LIFO) Method<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>The working of this method can be understood with the following illustration. The following are purchases of material during the month Jan. 2015:<\/p>\n<ul>\n<li>Jan. 1, 2011 Opening Balance 1,000 units @ Rs 2<\/li>\n<li>Jan. 6 Received from vendor 400 units @ Rs 3<\/li>\n<li>Jan. 11 Received from vendor 300 units @ Rs 4<\/li>\n<li>Jan. 20 Received from vendor 600 units @ \u201eRs 3<\/li>\n<li style=\"text-align: justify\">Jan. 26 Received from vendor 800 units @ \u201eRs 2 Issues of materials were as follows:<\/li>\n<li>Jan. 5- 400 units,<\/li>\n<li>Jan 10 \u2013 800 units<\/li>\n<li>Jan.18- 200 units<\/li>\n<\/ul>\n<p>Prepare store ledger accounts showing how the value of the issues would be recorded under LIFO method<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Store ledger accounts<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-349 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-144.png\" alt=\"\" width=\"860\" height=\"255\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-144.png 860w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-144-300x89.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-144-768x228.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-144-65x19.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-144-225x67.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-144-350x104.png 350w\" sizes=\"auto, (max-width: 860px) 100vw, 860px\" \/><\/p>\n<div>\n<p><strong>FEATURES OF LIFO METHOD<\/strong><\/p>\n<p>Some of Features of LIFO Method are explained as below<\/p>\n<p>&nbsp;<\/p>\n<p><strong>1.\u00a0 <\/strong><strong>Assumption of method: <\/strong>LIFO is based on the principle that<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 the last inventory goods received will be the first inventory goods sold or used.<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 arrive last are the first to be used.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>2.\u00a0 <\/strong><strong>Value of Inventory<\/strong><\/p>\n<p style=\"text-align: justify\">When the LIFO method is used, the inventory at the end of a year consists of the goods placed in inventory at the beginning of the year. Thus, under this method, inventory valued at the earliest cost.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>3.\u00a0 <\/strong><strong>In circumstances of Fluctuations in Prices: <\/strong>These can be divided in to two parts<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of rising prices<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In periods of falling prices<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 result in the lowest ending inventory,<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 highest cost of goods sold,<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Lowest net income.<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Reduction in liability for payment of taxes.<\/p>\n<p style=\"text-align: justify\"><strong>In periods of falling prices<\/strong>: In periods of falling prices, LIFO method will result in<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 inventory will be valued at a higher prices<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 resulting in increase the profits,<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Increasing the income tax liability.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>4.\u00a0 <\/strong><strong>Effect on Balance sheet and Income statement <\/strong>These can be divided in to two parts<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 In normal circumstances<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Incase Fluctuation in Prices<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>In normal circumstances: <\/strong>In normal circumstances when this method is used balance sheet shows a distorted picture since the inventory at end is shown at old costs <strong>Incase Fluctuation in Prices: <\/strong>These can further be divided in to two parts:<\/p>\n<p>&nbsp;<\/p>\n<p><strong>In periods of rising price LIFO method gives<\/strong><\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a more meaningful, true and fair view of balance sheet<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a less realistic income statement.<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a less meaningful balance sheet<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 a more realistic income statement.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>ADVANTAGES OF LIFO METHOD:<\/strong><\/p>\n<\/div>\n<p><strong>\u00a0<\/strong><\/p>\n<p>The method has the following advantages:<\/p>\n<ul>\n<li style=\"text-align: justify\"><strong>(i) <\/strong><strong>Valuation of issues at current prices: <\/strong>Under LIFO method current market prices are used for valuing materials issued to different jobs or calculating the cost of goods sold.<\/li>\n<\/ul>\n<ul>\n<li style=\"text-align: justify\"><strong>(ii) <\/strong><strong>No unrealized profit or loss<\/strong>: LIFO method is based on cost and no unrealized profit or loss recorded under this method.<\/li>\n<li style=\"text-align: justify\"><strong>(iii) <\/strong><strong>Suitability <\/strong>LIFO method is suitable for materials non-perishable type.<\/li>\n<li style=\"text-align: justify\"><strong>(iv) <\/strong><strong>Lower a business&#8217;s tax liability: <\/strong>When LIFO method used in the times of growing inflation it can reduce a company\u201fs tax responsibility.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><strong>DISADVANTAGES OF LIFO METHOD:<\/strong><\/p>\n<p>The method suffers from the following disadvantages:<\/p>\n<ul>\n<li style=\"text-align: justify\"><strong>(i) <\/strong><strong>Not appropriate for some businesses: <\/strong>This method is not appropriate for businesses with perishable inventory items because those businesses have to sell the oldest inventory items first.<\/li>\n<li style=\"text-align: justify\"><strong>(ii) <\/strong><strong>Create obsolete inventory: <\/strong>LIFO can incur obsolete inventory. This is because older inventory will remain on the shelves and may become obsolete over time.<\/li>\n<li style=\"text-align: justify\"><strong>(iii) <\/strong><strong>IFRS prohibit the use of LIFO: <\/strong>Finally, International Financial Reporting Standards not recommend the use of LIFO and it has been heavily regulated under the International Financial Reporting Standards<\/li>\n<\/ul>\n<p><strong>LAST IN FIRST OUT (LIFO) METHOD<\/strong><\/p>\n<ul>\n<li style=\"text-align: justify\">Under LIFO method the newest inventory is recorded as sold or used first.<\/li>\n<\/ul>\n<p><strong>ADVANTAGES OF LIFO METHOD<\/strong><\/p>\n<ul>\n<li>Lower a business&#8217;s tax liability<\/li>\n<li>Valuation of issues at current prices<\/li>\n<li>No unrealized profit or loss<\/li>\n<li>Not appropriate for some businesses<\/li>\n<li>Create obsolete inventory<\/li>\n<li>IFRS prohibit the use of LIFO<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-350\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-145.png\" alt=\"\" width=\"968\" height=\"389\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-145.png 968w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-145-300x121.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-145-768x309.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-145-65x26.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-145-225x90.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-145-350x141.png 350w\" sizes=\"auto, (max-width: 968px) 100vw, 968px\" \/><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-351 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-146.png\" alt=\"\" width=\"944\" height=\"487\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-146.png 944w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-146-300x155.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-146-768x396.png 768w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-146-65x34.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-146-225x116.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-146-350x181.png 350w\" sizes=\"auto, (max-width: 944px) 100vw, 944px\" \/><\/p>\n<div>\n<p><strong>4. WEIGHTED AVERAGE PRICE METHOD<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Weighted Average Price Method is based on the assumption that materials or goods which are purchased are combined into a common bin, after that they lose their separate identity. The inventory does not consist of specific batch of goods. The inventory is thus priced on the basis of Weighted Average prices. These are weighted according to the quantity purchased at each price. Weighted Average cost is calculated given as below:<\/p>\n<table style=\"height: 114px\">\n<tbody>\n<tr style=\"height: 43px\">\n<td style=\"height: 43px;width: 169.063px\">Average cost =<\/td>\n<td style=\"height: 43px;width: 627.063px\">value of inventory at beginning of year + purchases during the year<\/td>\n<\/tr>\n<tr style=\"height: 28px\">\n<td style=\"height: 28px;width: 169.063px\"><\/td>\n<td>Number of units at the beginnning of year + number of units purchased during year<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Example of Weighted Average Price Method:<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">The working of this method can be understood with the following illustration. The working of this method can be understood with the following illustration. The following are purchases of material during the month Jan. 2015:<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan. 1, 2011 Opening Balance 1,000 units @ Rs 2<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan. 6 Received from vendor 400 units @ Rs 3<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan. 11 Received from vendor 300 units @ Rs 2 Issues of materials were as follows:<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan. 5- 400 units,<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan 10 \u2013 800 units<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Jan.18- 200 units<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Prepare store ledger accounts showing how the value of the issues would be recorded under LIFO method<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Store ledger Account<\/strong><\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-352 aligncenter\" src=\"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-147.png\" alt=\"\" width=\"679\" height=\"230\" srcset=\"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-147.png 679w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-147-300x102.png 300w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-147-65x22.png 65w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-147-225x76.png 225w, https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-content\/uploads\/sites\/67\/2018\/10\/Untitled-147-350x119.png 350w\" sizes=\"auto, (max-width: 679px) 100vw, 679px\" \/><\/p>\n<p><strong>ADVANTAGES OF WEIGHTED AVERAGE PRICE METHOD:<\/strong><\/p>\n<p style=\"text-align: justify\">The main advantages of this method are as below:<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>(i)\u00a0 \u00a0 \u00a0<\/strong><strong>Logical<\/strong>: Weighted Average Price Method logically recognizes that identical items of inventory, even purchased at different intervals, have equal value.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(ii)\u00a0 \u00a0<\/strong><strong>Minimizes fluctuations and ease the pricing process<\/strong>: Weighted Average Price Method minimizes fluctuations in costs of materials issued. Further, it eases the pricing process.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(iii)\u00a0 \u00a0<\/strong><strong>Smoothes out fluctuations in profits<\/strong>: Weighted Average Price Method smoothes out fluctuations in profits that have occurred due to price fluctuations.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(iv)\u00a0 \u00a0\u00a0<\/strong><strong>Computerized system can be applied<\/strong>: Weighted Average Price Method is easier to be computerized than other methods of valuation of inventories.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(v)\u00a0 \u00a0 \u00a0<\/strong><strong>Acceptable by tax authorities and IAS<\/strong>: This method of valuation of inventories also recommended and acceptable by tax authorities and IAS 2.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(vi)\u00a0\u00a0<\/strong><strong>Popular method<\/strong>: Weighted Average Price Method is very popular on account of its being based on the total quantity and value of materials purchased.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>DISADVANTAGES OF WEIGHTED AVERAGE PRICE METHOD:<\/strong><\/p>\n<p style=\"text-align: justify\">Some of the limitations of this method are given as below:<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\"><strong>(i)\u00a0\u00a0<\/strong><strong>Does not reflect actual price<\/strong>: Weighted Average Price Method does not reflect actual price paid for as it based on average price. Therefore, it values inventory at average prices not on actual prices.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p style=\"text-align: justify\"><strong>(ii)\u00a0 \u00a0<\/strong><strong>Rounding off create problems<\/strong>: Calculations in Weighted Average Price Method results in figures with several decimal places. Rounding off results in slightly inaccurate figures.<\/p>\n<p><strong>\u00a0<\/strong><\/p>\n<p><strong>(iii)\u00a0 \u00a0<\/strong><strong>Not suitable<\/strong>: In period of rising prices, Weighted Average Price Method does not reflect current prices.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><strong>WEIGHTED AVERAGE PRICE METHOD<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7 Weighted Average Price Method is based on the assumption that materials or goods which are purchased are combined into a common bin, after that they lose their separate identity.<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0 \u00a0 Inventory is thus priced on the basis of Weighted Average prices.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>ADVANTAGES OF WEIGHTED AVERAGE PRICE METHOD:<\/strong><\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Logical<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Minimizes fluctuations and ease the pricing process<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Smoothes out fluctuations in profits<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Computerized system can be applied<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Acceptable by tax authorities and IAS<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Popular method<\/p>\n<\/div>\n<p>&nbsp;<\/p>\n<div>\n<p><strong>DISADVANTAGES OF WEIGHTED AVERAGE PRICE METHOD<\/strong><\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Does not reflect actual price<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Rounding off create problems<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Not suitable<\/p>\n<p>&nbsp;<\/p>\n<p><strong>COMPARISON OF FIFO AND WEIGHTED AVERAGE PRICE METHOD<\/strong><\/p>\n<p>FIFO\u00a0 and\u00a0 Weighted\u00a0 Average\u00a0 Price\u00a0 Method\u00a0 provide\u00a0 different\u00a0 results\u00a0 in\u00a0 different<\/p>\n<p>&nbsp;<\/p>\n<p>circumstances and some of these are explained below in table:<\/p>\n<table class=\"aligncenter\">\n<tbody>\n<tr>\n<td style=\"width: 231.063px\"><strong>Situation<\/strong><\/td>\n<td style=\"width: 47.0625px\"><strong>FIFO<\/strong><\/td>\n<td style=\"width: 164.063px\"><strong>Weighted Average Price<\/strong><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 231.063px\"><\/td>\n<td style=\"width: 47.0625px\"><\/td>\n<td style=\"width: 164.063px\"><strong>Method<\/strong><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 231.063px\"><strong>If prices are showing rising trend<\/strong><\/td>\n<td style=\"width: 47.0625px\"><\/td>\n<td style=\"width: 164.063px\"><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 231.063px\">Value of inventory at the end<\/td>\n<td style=\"width: 47.0625px\">Higher<\/td>\n<td style=\"width: 164.063px\">Lower<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 231.063px\">Net Income<\/td>\n<td style=\"width: 47.0625px\">Higher<\/td>\n<td style=\"width: 164.063px\">Lower<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 231.063px\">Valuation of Assets<\/td>\n<td style=\"width: 47.0625px\">Higher<\/td>\n<td style=\"width: 164.063px\">Lower<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 231.063px\"><strong>If prices are showing rising trend<\/strong><\/td>\n<td style=\"width: 47.0625px\"><\/td>\n<td style=\"width: 164.063px\"><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 231.063px\">Value of inventory at the end<\/td>\n<td style=\"width: 47.0625px\">Lower<\/td>\n<td style=\"width: 164.063px\">Higher<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 231.063px\">Net Income<\/td>\n<td style=\"width: 47.0625px\">Lower<\/td>\n<td style=\"width: 164.063px\">Higher<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 231.063px\">Valuation of Assets<\/td>\n<td style=\"width: 47.0625px\">Lower<\/td>\n<td style=\"width: 164.063px\">Higher<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>SELECTION OF BEST METHODS<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">There are several methods to value and cost inventory. Inventories represent important current assets of a concern. Selection of the right inventory valuation method depends on the specific characteristics and objectives of the valuation. Below are the recommendations of Indian accounting standard and International Financial Reporting Standard about selection of valuation method of inventory.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Recommendation from Accounting Standard 2 (Revised)<\/strong><\/p>\n<p>Accounting Standard 2 (Revised) provides<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 First in First out (FIFO) or Weighted Average method for computing the cost of inventories.<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 It has recommended the use of specific Identification Method only in case of goods or services which are meant for specific projects.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">Under IFRS, entities are permitted to employ one of three cost formulas when reporting inventory expense. These methods are:<\/p>\n<p>&nbsp;<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Specific Identification<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 First-in, First-out (&#8220;FIFO&#8221;)<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Weighted-Average Cost<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">So, it can be concluded that generally FIFO and Weighted Average method are popular and recommended methods.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Generally FIFO and Weighted Average method are popular and recommended methods.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>SUMMARY<\/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. According to Accounting Standard 2 (Revised), the\u00a0<span style=\"text-align: initial;font-size: 1em\">inventories should be valued at the lowest of \u201ccost\u201d and \u201cnet realisable value\u201d. There are different methods for assigning historical costs to inventory and goods sold. These mainly include Specific Identification Method, FIFO,LIFO and Weighted Average Price Method. Generally FIFO and Weighted Average method are popular and recommended methods.<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><strong>you can view video on FIFO and LIFO Methods of Valuation of Inventory<\/strong><\/td>\n<td><a href=\"https:\/\/youtu.be\/Mue4GNuPIn0\" 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<\/div>\n<div>\n<p><strong>SUGGESTED READINGS<\/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\">\u00a0Lal,\u00a0 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\">\u00a0Goyal, V.K. and Ruchi Goyal (2012) \u201cFinancial Accounting\u201d PHI.<\/li>\n<li style=\"text-align: justify\">\u00a0 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\">\u00a0 Raiyani Jagadish R International Financial Reporting Standards (IFRS) &amp; Indian Accounting Practices\u201d New Century Publications.<\/li>\n<li style=\"text-align: justify\">\u00a0Patel, Chintan N. and Bhupendra Mantri (2015) \u201cIndian Accounting Standards (IND AS)\u201d Taxmann.<\/li>\n<li style=\"text-align: justify\">\u00a0 Monga, J.R. \u201cAvanced Financial Accounting\u201d Mayoor Paperbacks.<\/li>\n<li style=\"text-align: justify\">\u00a0 \u00a0 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<ul>\n<li style=\"text-align: justify\">\u00a0Specific identification method is suitable in situations where it is possible to physically separate different purchases a each item sold and each item remaining in the inventory can be identified.<\/li>\n<li style=\"text-align: justify\">\u00a0According to FIRST IN FIRST OUT (FIFO) METHOD inventory is used\/ sold in the order they have been purchased and older inventory is issued first.<\/li>\n<li style=\"text-align: justify\">Under LIFO method the newest inventory is recorded as sold or used first.<\/li>\n<\/ul>\n<\/div>\n<ul>\n<li style=\"text-align: justify\">Weighted Average Price Method is based on the assumption that materials or goods which are purchased are combined into a common bin, after that they lose their separate identity.<\/li>\n<li style=\"text-align: justify\">Inventory is thus priced on the basis of Weighted Average prices.<\/li>\n<li style=\"text-align: justify\">Generally FIFO and Weighted Average method are popular and recommended methods.<\/li>\n<\/ul>\n","protected":false},"author":3,"menu_order":38,"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-341","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\/341","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\/341\/revisions"}],"predecessor-version":[{"id":501,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/pressbooks\/v2\/chapters\/341\/revisions\/501"}],"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\/341\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/wp\/v2\/media?parent=341"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/pressbooks\/v2\/chapter-type?post=341"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/wp\/v2\/contributor?post=341"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/wp-json\/wp\/v2\/license?post=341"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}