STOCK VALUATION

1. Give the meaning of stock or inventory. The term stock means the tangible property which is held either for sale in the ordinary course of business or for use in the process of production or consumption in the process of production of goods for sale. Thus stock (inventory) consists of the following: a) Raw materials b) Work-in-progress c) inished good !. !"#ain the im"ortance of stock va#$ation. "aluation of stock is important due to the following reasons: a) #roper determination of profit: #roper determination of profit depends upon the proper valuation of stock. $f stock is over valued it leads to overstatement of profit% if it is undervalued% it leads to understatement of profit. &o% determination of correct profit re'uires proper valuation of stock b) (orrect financial position: &tock is the ma)or portion of current assets. $f the stock is not shown at its correct value in the balance sheet% it will give wrong idea about the li'uidity position of the concern. c) or proper managerial decision: or taking correct managerial decision% the management uses ratio analysis as its tool. &o% calculation of different ratios like current ratio% stock turnover ratio re'uires correct closing stock figure. %. &hat are the t'o systems of stock taking( There are two systems of stock taking. They are i) )erio*ic Inventory System ii+ )er"et$a# Inventory System i) #eriodic $nventory &ystem: *nder this method the value of stock is ascertained by physical counting of the stock at the end of a particular period% usually once in a year. $t is a simple and economical method of stock taking and can be adopted by small concerns. ii) #erpetual $nventory &ystem: *nder this system detailed records of every receipt and issue of stock are maintained by the stores controlling department. The record so maintained reflects the physical movement of stocks and their balances. &o% physical stock can regularly be verified with the stock records. This method is scientific and stock in hand on a particular date can be ascertained without much difficulties. ,. -ring o$t *ifferences .et'een )erio*ic an* )er"et$a# Inventory Systems #oints #eriodic $nventory &ystem #erpetual $nventory &ystem +asis $t is based on physical stock $t is based on records taking maintained ,vailability of $t provides data periodically $t provides data continuously information (ost $t is a simple - economical $t is e.pensive as detailed method records are to be maintained (ontrol $t does not provide basis for $t provides basis for effective effective stock control stock control &uitability &uitable for small concerns &uitable for medium - large concerns
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/. &hat are the *ifferent metho*s of stock va#$ation( The important methods available for valuing the stock are: a) irst in irst 2ut. ( $ 2) b) 3ast in irst 2ut. (3$ 2) c) ,verage (ost 4ethod. (,"(2) d) 5ighest in irst 2ut. (5$ 2) 0. !"#ain the 1irst in 1irst O$t 2etho* an* Last in 1irst O$t metho*. irst in irst 2ut 4ethod: *nder this method% materials or goods received first are issued first. $n other words% materials or goods are issued in the order of their receipt. 3ast in irst 2ut method. This method is opposite of the $ 2 method. *nder this method materials received last are issued first 3. &hat are the a*vantages an* *isa*vantages of 1I1O metho*( $mportant advantages of $ 2 method are: a) This method is simple to understand and easy to calculate b) $t is a logical method because first receipts are issued first c) (losing stock is valued nearer the market price d) This method is useful where prices are falling ( rom income ta. point) e) This method is useful when prices are rising ( rom profit point) f) This method is useful when stock is sub)ect to deterioration and obsolescence. $mportant disadvantages of $ 2 method are: a) (alculations become complicated when there are more purchases during a period. b) (ost of materials consumed charged to production are not related to current market price. 4. &hat are the a*vantages 5 *isa*vantages of LI1O metho*( $mportant advantages are: a) $t is simple and easy to prepare where purchases are few in number. b) The cost of production relates to the current price level because materials are issued from the last receipt. c) $nventory is valued at the earliest price% thus it helps in computation of correct price. $mportant disadvantages are: a) When there are more purchases and prices fluctuate too often this method involves complicated calculations and clerical errors will increase. b) $nventory does not reflect current prices. c) This method is not logical 1. &hat are the *ifferences .et'een 1I1O 5 LI1O6 $ 2 3$ 2 a) *nder this method first a) *nder this method latest receipts receipts are first issued are issued first. b) When prices are rising $ 2 b) When prices are falling 3$ 2 gives gives greater profit greater profit c) $ 2 does not match current c) 3$ 2 matches current cost with cost with current revenue current revenue d) $ 2 puts emphasis on the d) 3$ 2 puts emphasis on the income balance sheet statement

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16. !"#ain the effect of errors in stock va#$ation on "rofit. The effect of errors in stock valuation on cost of goods sold and profit may be summari9ed as follows: a) ,n over statement of closing stock understates cost of goods sold: over states gross profit and net profit. b) ,n under statement of closing stock over states cost of goods sold: under states gross profit - net profit. c) ,n over statement of opening stock over states cost of goods sold: under states gross profit - net profit. d) ,n under statement of opening stock understates cost of goods sold: over states gross profit and net profit. 11. !"#ain the 7istorica# cost metho* an* 8e"#acement cost metho*. 5istorical cost method: 5istorical cost means cost of ac'uisition and other e.penses paid such as transportation% insurance% ta.es% duties% etc. Replacement cost method: 4eans the price at which the inventory can be replaced on particular date. 5istorical cost method is based on cost price and replacement cost method is based on market price. 19. &hat *o yo$ mean .y materia# re:$isition note( ;2. 8. NO+ $t is a document which authorises and records the issue of materials for use. $t is a formal re'uest to issue materials stating description% 'uantity and work order for which the material is re'uired. , re'uisitioner and a higher authority should sign the note. This note is also called &tores Re'uisition ;ote. 1%. &hat *o yo$ mean .y goo*s receive* note( ;G. 8. NO+ $t is a document prepared by a stores keeper stating 'uantity% 'uality and other descriptions of materials received along with the date. 7<. =Stock is va#$e* at cost "rice or market "rice 'hichever is #o'er<. !"#ain. &tock is valued at cost price or market price whichever is lower. $t is known as 3(4 rule. &tock is valued at lower the cost price or market price to ensure that anticipated profits must not be accounted for until they have been reali9ed% but due provision must be made for anticipated losses. This principle of valuation is based on the important accounting convention of conservatism. 1/. &hat are the "ro.#ems of ho#*ing too m$ch stock( The important problems are: a) There may be an opportunity cost. b) &torage cost will go up. c) &poilage cost d) ,dministrative and financial cost 10. -ring o$t *ifferences .et'een Stock 5 Store. The important differences between the two are as follows: a) &tock is a part of business item where as store is not. b) &tock is purchased for the purpose of re-sale where as stores help in the process of production.

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c) Raw material% work in progress% finished goods are the e.amples of stock% whereas oil% cotton waste% spare parts are the e.amples of stores. 13. &hat is a .in car*( +in is a place% rack% cupboard% where materials are kept. , card is kept for each bin to indicate the stock position of the bin. This card is known as bin card. 14. &hat are the a*vantages of a .in car*( ,dvantages of bin card are: a) $t indicates at a glance the 'uantity of material in stock. b) $t is useful for the physical and actual verification of stock c) ,s it contains the ordering level% it helps the store keeper to initiate the purchase re'uisition for the fresh supply of a material. 1=. &hat *o yo$ mean .y stores #e*ger( &tores ledger is a record of stores purchased% issued and in hand at any time% showing both 'uantity and value. $t gives details such as name and code number of material% leadtime% ma.imum level% minimum level% and re ordering level. 96. &hat are the a*vantages of stores #e*ger( The advantages of stores ledger are: a) ,s it contains a continuous record of stores received% issued and balance in hand% it shows the current stock position. b) ,s it contains record of materials both in terms of 'uantity and value% it shows the amount of money invested in stock. c) $t enables the cost accountant to ascertain the stock in hand without actual verification. d) $t facilitates pricing or valuation of materials issued to production. 91. &hat are the *ifferences .et'een .in car* an* stores #e*ger( The main differences between the two are as follows: +in card &tores ledger a) The bin card is purely a a) The stores ledger is a record of 'uantitative record. i.e. record both 'uantity and value of 'uantity only b) The bin card is written by the b) The stores ledger is written by stores keeper the cost clerk c) The bin cards are kept in the c) The stores ledgers are kept in stores room the cost account department d) The entries in the bin cards are d) The entries in the stores ledger made on the basis of actual are made on the basis of goods 'uantity received or issued received note% material re'uisition note% etc. 99. &hat is the meaning of materia# transfer note( Whenever materials are directly transferred from one )ob or department to another% a note is prepared by the transferor department to record the transfer of materials. &uch a note is called a material transfer note. 4aterial transfer note contains the following particulars: a) >ate of material transferred
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b) ;ame of the transferor department and transferee department c) $tem code and number d) >escription of material. 9%. Give the meaning of materia# ret$rn note. , material return note is a document prepared by the production department for recording the return of e.cess materials to the stores. 4aterial return note contains the following information: a) >ate of materials returned b) ;ame of the department which returned the material. c) $tem code and number d) ?uantity of material returned 9,. &hat are the a*vantages of "er"et$a# inventory system( ,dvantages are: a) $t ensures a detailed a more reliable check on the stores. b) $t facilitates verification of stores in hand at anytime. c) $t eliminates the elaborate and costly work of annual stock taking d) The availability of stock figures at all the times facilitates the preparation of interim profit - loss account and balance sheet. e) ,s the management is constantly kept informed of the stock position% it can plan production according to availability of materials in stores. 9/. &hat are the *isa*vantages of "er"et$a# inventory system( >isadvantages are: a) This system is costly. b) This system cannot be adopted by small concerns. c) This system gives information about the book balance of every item of stores available at all times but information about physical or actual balance of a particular item of stock may not be available on a particular date. 90. &hat are the a*vantages of "erio*ic stock taking( ,dvantages of periodic stock taking are: a) *nder this system% the stock of every item is physically verified. b) ,s it is less e.pensive% it suits small business concern. c) $t gives the actual 'uantity of stock of each item of material on a particular date. 93. &hat are the *isa*vantages of "erio*ic stock taking( >isadvantages are: a) This system of stock taking results in stoppage of production during the stock taking period. b) The fraud or irregularities% if% any% is brought to light only at the end of the specified period. c) ,s the actual stock figures are available only at the end of the period% this system does not facilitate the preparation of an interim profit - loss account and a balance sheet 94. &hat is stock reconci#iation statement( $t is the statement prepared to ascertain the stock figure to be included in the final accounts when the stock is valued before or after the closing date.

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