Inventories for CA Foundation
Valuing inventories under AS 2: what counts as cost, net realisable value, the FIFO and weighted average formulas, and the periodic and perpetual systems.
AccountingPaper 112 MCQs2 lessons2 flashcards3 memory tricks
What you'll learn
- Cost and net realisable value
Measure inventory at the lower of cost and NRV. - Cost formulas and inventory systems
Price issues and closing stock by FIFO and weighted average.
Key formulas
| Measurement | Lower of cost and NRV |
|---|---|
| NRV | Estimated selling price − costs of completion − costs to sell |
Concepts explained
Lower of cost and net realisable value
AS 2 measures inventories at the lower of cost and NRV, so stock is never shown at more than it is expected to bring in.
What it means
- NRV = estimated selling price − estimated costs of completion − estimated costs to sell.
- Compare item by item, or for groups of similar items.
- A write-down to NRV is charged to profit and loss.
- If NRV later rises, the write-down is reversed (up to original cost).
- A: cost 20,000, NRV 24,000; B: cost 15,000, NRV 12,000
Answer: 20,000 + 12,000 = ₹32,000
- Cost 10,000; can sell for 9,000 after ₹1,500 repairs
- NRV = 7,500
Answer: Value at ₹7,500
Related terms
- Prudence: don't anticipate profits; provide for losses
- Write-down: reduction of inventory to NRV
Exam tip: Never add profit to inventory: if NRV is above cost, stay at cost.
What goes into the cost of inventory
Cost includes all costs of purchase, conversion and other costs incurred to bring inventories to their present location and condition.
What it means
- Included: purchase price, duties, non-refundable taxes, freight inward, handling, direct labour, production overheads.
- Excluded: abnormal wastage, storage (unless part of production), administrative overheads, selling costs.
- Inventories: raw materials, work in progress, finished goods, stores and spares; not fixed assets.
- Specific identification for non-interchangeable items.
- Price 1,00,000; customs 10,000; freight inward 5,000; advertising 3,000
Answer: Cost ₹1,15,000 (advertising excluded)
- Normal loss 2%, abnormal loss 3%
Answer: Only the abnormal 3% goes to P&L
Related terms
- GST input credit: recoverable taxes are excluded from cost
- Conversion cost: labour and production overheads
Exam tip: Ask: was this cost needed to bring the goods here and make them ready? If not, exclude it.
FIFO, weighted average and inventory systems
FIFO issues the oldest stock first; weighted average uses the average cost of units available. AS 2 doesn't allow LIFO.
What it means
- FIFO: closing stock at latest prices; in rising prices, higher closing stock and profit.
- Weighted average: total cost ÷ total units available.
- Perpetual system: continuous records; periodic: count at period end.
- Specific identification for unique items.
- 10 @ 10 and 20 @ 13; issue 15
Answer: ₹165
- (100 + 260) ÷ 30
Answer: ₹12 per unit
Related terms
- Bin card: store's quantity record
- Stores ledger: accounts department's quantity and value record
Exam tip: Weighted average weighs by quantity, never the simple average of prices.
Memory tricks
Inventory = lower of cost and net realisable value (AS 2).
FIFO: issues at oldest prices; closing stock at latest prices.
Cost includes purchase, conversion, bringing to location; excludes selling, abnormal waste, admin.
Try 3 CA Foundation-style questions
Q1. Net realisable value is
- the original cost plus profit
- estimated selling price less estimated costs of completion and costs to sell
- replacement cost
- the list price in the catalogue
Show answer
Answer: (2) estimated selling price less estimated costs of completion and costs to sell
NRV = estimated selling price in the ordinary course of business − estimated costs of completion − estimated costs needed to make the sale.
Q2. The specific identification method of costing is used for
- large quantities of identical items
- all inventories by law
- items that are not ordinarily interchangeable, such as custom-made goods
- only raw materials
Show answer
Answer: (3) items that are not ordinarily interchangeable, such as custom-made goods
AS 2 requires specific identification for items not ordinarily interchangeable and for goods produced and segregated for specific projects.
Q3. Which of the following is NOT an inventory?
- Raw materials
- Work in progress
- Finished goods held for sale
- Machinery used in production
Show answer
Answer: (4) Machinery used in production
Inventories are assets held for sale, in production for sale, or as materials consumed in production. Machinery is a fixed asset.
Practise all 12 questions Free · explanations for every option · see where you go wrong