The method used to assign a monetary value to unsold inventory at the end of an accounting period.
Stock/Inventory Valuation determines the cost assigned to closing stock on the balance sheet and directly impacts cost of goods sold (COGS) and profitability. Under Ind AS 2, inventory is valued at the lower of cost or net realizable value. Cost methods include: FIFO (First-In-First-Out), Weighted Average Cost, and Specific Identification. LIFO is NOT permitted under Indian GAAP or IFRS. The method chosen affects reported profits — in times of rising prices, FIFO gives higher profit (lower COGS) while Weighted Average gives moderate results. Consistency in valuation method is mandatory across periods.
Purchases: Batch 1 (100 units @ ₹50), Batch 2 (100 units @ ₹60), Batch 3 (100 units @ ₹70). Sold: 150 units. Closing stock: 150 units. FIFO valuation: 100 @ ₹70 + 50 @ ₹60 = ₹10,000. Weighted Average: 150 × ₹60 (average) = ₹9,000. FIFO gives higher closing stock value (₹10,000 vs ₹9,000) and thus higher profit in rising price conditions.
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FIFO is most common and matches physical flow (oldest stock sold first — especially for perishables). Weighted Average smooths out price fluctuations (good for commodities, raw materials). Specific Identification is used for high-value unique items (cars, jewellery, real estate). Indian tax authorities accept all three methods if applied consistently.
If inventory's market value falls below purchase cost (due to damage, obsolescence, or market decline), you must write it down to the lower NRV. Example: Bought phones at ₹20,000 but newer model launched, these can only sell for ₹15,000. Value at ₹15,000 (NRV), not ₹20,000 (cost). The ₹5,000 write-down is charged to P&L — conservative accounting principle.
An inventory valuation method where goods purchased or manufactured first are sold or used first, meaning the oldest stock is consumed before newer stock.
An inventory valuation method where the most recently purchased or produced items are assumed to be sold first.
An inventory valuation method that calculates the average cost per unit by dividing total cost of goods available by total units available, updating with each new purchase.
A ratio that measures how many times a company's inventory is sold and replaced over a specific period, indicating sales efficiency and inventory management.
The direct costs attributable to the production or purchase of goods sold by a company during a specific period.
The process of ordering, storing, tracking, and controlling goods to ensure the right quantity is available at the right time while minimizing holding costs.
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