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3 ACCOUNTING FOR INVENTORY


Introduction
Inventory means any stock held by a manufacturing business to meet its production re-
quirements. A trading concern holds stock of goods for sale.
As per Indian Accounting Standard 2 [AS.-2] Inventories mean tangible property held
(i) for sale in the ordinary course of business, or
(ii) in the process of production for such sale, or
(iii) for consumption in the production of goods or services for sale, including maintenance
supplies and consumables other than machinery spares.
Valuation of Inventory
AS 2 and its implications
Before going into any discussion regarding any method of inventory valuation the epitome of
Indian Accounting Standard 2 (AS 2) should be understood. It says that—
(i) Inventory should normally be valued at historical cost or net realisable value whichever
is lower.
(ii) Historical Cost is the combination of (a) cost of purchase; (b) cost of conversion; and (c)
any other cost incurred in the normal course of a business to bring the inventories up to
their present location and condition.
(iii) Net realisable value represents the actual or the estimated selling price less cost of
completion and sale.
(iv) By Products should be valued as the lower of cost and net realisable value. Consumable
stores and maintenance supplies should generally be valued at cost.
Re-usable wastes should be valued at net realisable value, if reprocessing is possible.
Goods which are not interchangeable and which are manufactured for a specific purpose
should be valued at specific costs.
Where there is a scope of analysing the difference between the Standard Cost and Actual
Cost (that is, Variance Analysis) direct costing or absorption Costing may be applied.
(v) Cost of Purchase = Purchase Price + Duties and Taxes (unless recoverable from tax
ing authorities like CENVAT credit) + Other expenses directly related to the acqui
sition of goods (-) Trade Discounts, Rebates, etc.
(vi) Cost of Conversion includes any cost related to, production including any overhead
cost.

Financial Accounting 33
ACCOUNTING CONVENTION, AND PRACTICES

(vii) For retail businesses, adjusted selling price (that is, selling price less gross margin of
profit) may be applied.

(viii) Production Overheads should be included only to the extent whiéh has brought the
inventory to the present condition or location. It may be illustrated as—
(a) Production Overheads may be Fixed or Variable by nature.
(b) Fixed Overheads should normally be spread over units produced on the basis of
normal capacity.

For example, if the normal capacity is 10,000 units, actual production is 6,000 units, units
sold is 5,000 units and Fixed Overhead is Rs. 30,000—
Normal Recovery Rate should be Rs.30,000 /10,000 or Rs. 3 per unit. In that case 10,000
units overhead recovered becomes 6,000 x Rs. 3 or Rs. 18,000 (at normal rate). The under
recovery of Rs. 30,000 — Rs. 18,000 or Rs. 12,000 is treated as an expense of the year. For
valuation of Stock (in this case 6,000 — 5,000 = 1,000 units), Fixed Production Cost is
1,000 x Rs. 3 = Rs. 3,000.
BUT if actual production is abnormally high say 20,000 units, the overhead rate applicable
for stock valuation should be based on the actual production. It should be Rs. 30,000 / 20,000
or Rs. 1.50 per unit.
(c) Variable Overheads should be based on the actual units produced.

(iii) Inventory carried at net realisable value should be separately disclosed.


Methods of Inventory Valuation
As per AS-2, the following two methods of inventory valuation are recommended :

1. FIFO.
2. Weighted average cost.
Cost Formulae

Inventory should be valued at cost price or net realisable price whichever is lower.
If inventory valuation is made at cost any one of the following methods may be adopted
1. First in First out (abbreviated as FIFO) method : Under this method, the goods which
are produced first or acquired first are sold first or used first for production. The se-
quence of issue of goods for sale or production follows the sequence or order in which
they have been received. The goods which remain as unsold stock are valued at current
cost price. According to Littleton and Paton “the cost factors move through the busi-
ness in procession fashion” under FIFO method.

34 Fianancial Accounting
Advantages
(i) Stock represents goods purchased recently. So the valuation is made at current pur-
chase price,
(ii) Accounting involves recording of transactions in a chronological manner. FIFO con-
forms to that order.
(iii) It is a simple method approved by Tax and other authorities.
(iv) As issues are priced in the same order in which materials have been acquired, the issues
are made at actual cost.
(v) Where the nature of materials is slow moving or bulk items are not issued, this method
is very useful.
Disadvantages
(i) Where the price level goes up steadily or it fluctuates, this method is not useful.
(ii) The prices of issues do not reflect the current market prices.
(iii) Matching of current costs with current revenues does not become possible.
2. Last in First out (abbreviated as LIFO) method : Here the materials received last are
assumed to be issued first from the stores. So, the issue price becomes the price of that lot
of materials which has entered last into the stores. The current cost of materials is charged
against revenue. The unsold stock is valued at an old price which, generally becomes
lower than the current cost price.
It is a method used for ‘pricing of issues’. The physical issue of materials may not follow the
principle that goods received last are to be issued first. Its emphasis is on the use of latest or
current cost for computing cost of production. If it is followed, the replacement of used stock
does not involve additional cost. So, it is also known as Replacement Cost Method.
Advantages:
(i) Cost of production is charged at current price. If the price level shows an increasing
trend, higher amount is charged against revenue for cost of materials used.
(ii) Closing Stock is valued at an earlier or old price. So, the valuation will conform to mini-
mum realisable price and shall not include any profit element.
(iii) During inflation, application of this method gives more pragmatic result.
(iv) Current cost is matched against revenue. So, the matching cost principle can be used
more effectively.
Disadvantages:
(i) If the price level is decreasing or fluctuating, this method gives inaccurate result.

Financial Accounting 35
ACCOUNTING CONVENTION, AND PRACTICES

(ii) The closing stock can never reflect current market price.
(iii) In India AS 2 does not approve it. The Income Tax Authorities do not allow it. In USA
the Generally Accepted Accounting Principles allow it for use in Tax Returns only.
3. Weighted Average Method For finding out the weighted average rate for stock valua-
tion both quantity and price of different lots of materials existing in the stock are consid-
ered. The weighted average rate is found by adding the costs of all lots held at the time
of issue and then dividing that total cost by the total quantity of the materials held. Once
a rate is calculated it is applied until a new purchase is made. It does not consider
whether the quantities purchased earlier have already been consumed.
Advantages:
(i) If prices fluctuate considerably and issue of materials has to be made in several lots, this
method becomes very much useful.
(ii) Weighted average rate is mathematically sound as it considers both quantity and price.
(iii) During inflation, the value of stock becomes much more realistic.
(iv) One rate can be consistently applied till a new purchase is made.
Disadvantages :
(i) The prices at which goods are issued do not reflect their actual costs.
(ii) Closing stock cannot show the current market price.
(iii) Where purchases and receipts of materials are frequent, this method results into math-
ematical complications.
(iv) If arithmetical accuracy is ignored at the time of calculating the weighted average rate,
unrealised profit or loss may creep into the value of materials.
4. Base Stock Method : Under this method,, according to Para 10 of AS 2, it is assumed
that a minimum quantity of inventory (or base stock) must be held at all times to carry
on business. Up to this quantity the inventory is valued at the cost at which it was
acquired. Any excess over this base stock may be valued under FIFO or LIFO method.
As this method assumes that a minimum level of stock must be maintained at all times,
it has a limited application. Where some basic raw materials are required and these are
of the same type. This method is suitable. It is applied in processing industries where
processing takes a considerable time.
Advantages:
(i) As already said this method is ideal for processing industries like refineries, taneries, etc.
(ii) Base stock is always valued at its cost of acquisition.
(iii) The additional stock over the basic requirement can be valued under any suitable method.

36 Fianancial Accounting
Disadvantages:
(i) Base stock is valued at historical cost. It is treated as a fixed asset, but there is no scope of
depreciating it.
(ii) The disadvantages of FIFO or LIFO exist regarding the valuation of additional stock.
(iii) This method is somewhat rigid. It requires necessary changes to cope with changes of
production capacity and policy matters regarding stock.
5. Specific Identification Method : As per Para 11 of AS 2 “The specific identification
formula attributes specific costs to identified goods that have been bought or manufac-
tured and are segregated for a specific purpose.” Thus, under this method valuation is
made at the original or actual cost price for the specific quantity of identified goods.This
method has limited applications. The scale of operation should not be large and identi-
fication of goods must be possible. There should not be frequent receipts and issues of
materials. The inventories should not be interchangeable and these have to be earmarked
for specific purposes.
Its greatest advantage it is that it renders a correct valuation of stock and at the same time
ensures correct matching of costs with revenues.
It involves difficulties and clerical errors if The movement of goods is frequent and if there
are considerable price fluctuations.
6. Standard Cost Method : Under this method a rate is predetermined and considered as
the standard rate for valuing cost of sales and inventories. It uses some anticipated rates.
According to AS—2, such rates should be realistic and should be reviewed regularly.
There should be sufficient scope of analysing and reconciling the variances between
actual costs and standard costs. It is usually found in job and process type of industries.
7. Adjusted Selling Price (also Called Retail Inventory) Method: It is used in retail busi-
ness or in business where the stock Consists of items whose individual costs cannot be
readily asertained. At first, the retail price of the goods is ascertained and from that the
anticipated gross margin of profit on such goods is deducted. The calculation of the said
gross margin may be made. for individual items or groups of items or by the individual
departments where departmental accounting is possible.
This method may also be used in manufacturing organisations which like to value inventory
of finished products held against forward sale contracts.
8. Latest Purchase Price Method & Next In First Out (or NIFO) Method : Under this
method stock is not valued at any historical cost already incurred. Rather valuation of
inventory is made at a price which is the probable price of the goods to be received next
to the issue of the inventory.
This method is found to exist very rarely. Its only advantage is that stock valuation is made at
the up-to date replacement cost.
There are some more methods where stock valuation is made at cost. These are

Financial Accounting 37
ACCOUNTING CONVENTION, AND PRACTICES

(a) Highest in First Out or HIFO Method : Under this method it is assumed that the lot of
materials whose price is the maximum is to be issued first. The date of actual price of
such materials need not be considered. Thus cost of production is charged at the highest
rate but inventory is valued at the lowest price.
During a period when the price level changes rapidly, this method becomes useful.
(b) Moving Average Method : This may also be Simple Moving Average or Weighted Mov-
ing Average. A moving period is ascertained from a study of past move ments of
materials. Then the average is calculated on the basis of such period.
If Inventory is Valued at Market Price (not recommended by AS 2)
Issues of materials may be priced at the current market price. This may again be :
(a) Replacement Price or Purchase Price: It is the price existing at the time of issue. If mate-
rials are consumed in the process of production or sale, replacement has to be made by
new purchase from the market. So the replacement cost is given importance for inven-
tory valuation.
(b) Realisable Price or Sale Price Method : It is the price which can be realised if the mate-
rials issued to different jobs or work orders are sold out.
If Inventory is Valued at a Notional Price
Notional Price is not the cost or market price. It is a price ascertained on some notional basis.
It may be—
(a) Standard Price Method: The standard price is fixed on the basis of the specific nature of
the product or service and the factors related to that. All issues during an accounting
period are charged at the Standard Price. The stock is valued as the balancing amount
of
(i) costs of materials purchased or received at different rates and
(ii) the value of quantities issued at standard price.
(b) Inflated Price Method : Issues are priced at an inflated rate. Such rate is calculated after
considering—
(i) addition of proportionate stock holding or carrying costs like costs of inspecting,
issuing. etc.
(ii) deduction of natural or normal losses of materials, like leakage, evaporation, etc.
The cost of material issues is computed first by applying any method discussed earlier.
The adjustments [(i) and (ii) as stated above] are made to find out the inflated price. The
inventory is valued by deducting the issues priced at inflated rate from the total cost of
materials purchased during a period.

38 Fianancial Accounting
It is to be noted that :
1. Inventories mean any tangible property held for sale, in the process of production
for such safe or for consumption in the production of goods or services for sale.
Maintenance supplies and consumables shall be included. But machinery spares
should be excluded.
2. Valuation of Inventories is required at the end of each accounting period for (i) deter-
mining profit / loss during that period; and (ii) for representing these as assets in the
Balance Sheet.
3. The contents of AS 2 mandatory w.e.f. 1.4.1999, should be complied with by all
enterprises for Valuation of Inventories.
4. The method of valuation should be consistent but should not be rigid.
5. In India, inventories should normally be valued at historical cost or net realisable value
whichever is lower.
6. Historical cost is the combination of : (a) Cost of Purchase; (b) Cost of Conversion and
(c) any other cost incurred in the normal course of business for bringing the inventories
up to their present location and condition.
7. Net Realisable value is the Actual or Estimated Selling Price less cost of completion of
works and cost to be incurred to complete the scale.
8. Inventories are to be classified normally in the financial statements as :
(i) Raw materials and components;

(ii) Work-in-Process;
(iii) Finished goods; and
(iv) Stores and spares

9. Where an Inventory is carried at net realisable value, it should be disclosed in the finan-
cial statements separately.
10. By-products should be valued at cost or Net Realisable Value, whichever is lower. But if
the cost of byproducts cannot be ascertained separately, their stock should be valued at
Net Realisable Value.
11. If there is any scope of reprocessing, the inventory of re-usable scrap should be valued at
cost (of material) less reprocessing cost. But if there is no such scope, the inventory of re-
usable scrap should be valued at Net Realisable Value.

12. Inventory of non-reusable scrap should be valued at Net Realisable Value.


13. Perishable goods may be valued even below cost if conditions demand.

Financial Accounting 39
ACCOUNTING CONVENTION, AND PRACTICES

Methods of Ascertaining Net Realisable Value (NRV)


For ascertaining the net realisable value of different items of stock any one of the following
methods may usually be followed :

1. Total Inventory Method : The aggregate of the total cost of all items is found out. It is
compared with the total net realisable value of such items. The lower of the two is ap-
plied for inventory valuation.
2. Group Method Items of same nature are grouped. The cost and NRV of each group are
separately compared and the lower amount for each group is applied for stock valua-
tion.
3. Individual Identification Method : For each item of stock, corresponding cost and net
realisable value are compared and the lower of the two is considered for valuation of the
individual stock.

Valuation of Stock as on the Balance Sheet Date


1. Stocktaking should be made on the date of the close of a financial period. It should
include every item of goods of which the business is the owner. If there are any goods-
in-transit or goods with the selling agent or goods sent on approval for which the sale is
yet to be confirmed such goods should be included in stock. On the other hand, goods
sold but not yet delivered should be excluded.
Goods purchased within the accounting period and recorded in the accounts should be
included in stock. Thus physical stock in the godown of the business may not be the
actual value of stock to be included in the final accounts.
2. If stock taking is made on a date a few days before or after the date of the close of the
financial period, Purchases, Purchase Returns, Sales and Sales Return between these
two dates should be adjusted (to arrive at the value of the stock on the closing date of the
accounting period).
The sales and Sales Return should be taken at cost price or market price whichever is lower.
Notes
1. Where any sale has been made at a loss or at a profit not conforming to the normal rate
of profit, the cost price of the goods thus sold should be separately ascertained.
2. For valuation of inventory the principle of Cost Price or Net Realisable Price whichever
is lower should be applied.
3. Adjustments for undercasting /overcasting of stock, goods held for consignment basis,
etc., should also be made.

40 Fianancial Accounting
Illustration 1 :
Mr. X is a retailer. During the accounting year ending on 31.03.2008 he purchased 500 units
@ Rs. 350 each and sold 450 units @ Rs.250 each, through his agent who charged a commis-
sion of 10% on sales. X also paid Rs. 8,000 as expenses. But towards the end of this year the
market price fell down to Rs. 250 per unit. How the unsold stock should be valued?
Solution
Here Cost Price = Rs. 350 per unit; Unsold Stock = 500 — 450 = 50 units; Market Price = Rs.
550 Per unit

Particulars Rs.
Value of unsold stock [50 x Rs. 250] 12,500
(at Market Price, which is lower than the Cost Price)
Less : Probable marketing expenses (Commission @ 10% of Rs. 12,500] 1,250
Net Realisable Value 11,250

Illustration 2 :
From the following particulars, ascertain the value of inventory on 31.03.2008, the closing
date of the financial year of a trader
Normal Capacity of Production (Annual) 20,000 units
Fixed Production Overhead charges on normal capacity Rs. 40,000
Direct Material Cost Rs. 80 per unit
Direct Labour Cost Rs. 40 per unit
Variable Production Overhead Rs. 8 per unit
Actual Production 18,000 units
Units sold 15,000 units
Selling Price Rs. 220 per unit

Particulars Rs.
Direct Material 80
Direct Labour 40
Fixed Overhead [According to AS—2 fixed production 2
overhead should be absorbed to production over normal
capacity.
So it is Rs. 40, 000 for 20,000 unts
Variable Production Overhead 8
130

Financial Accounting 41
ACCOUNTING CONVENTION, AND PRACTICES

Market Price per unit is Rs. 220. Units of unsold stock = 18,000 — 15,000 = 3,000 units..
Value of Inventory = 3,000 x Rs. 130 = Rs. 39,000
Illustration 3 :
Kay Pee Ltd., a manufacturer and seller of car parts, received an order for manufacturing
and delivering some car head lights for passenger cars to be launched by Bharatiya Ltd.
during the year ended 3 1.3.2008. It received a non-refundable advance of Rs. 40,000 against
such order. But before the year end, Bharatiya Ltd. refused to take the delivery of the head
lights as it discovered some technical defects in its own manufacturing plan.
So, on 31.3.2008, Kay Pee Ltd. which had partly finished the products, had these in its stock.
It asked for your help regarding their valuation and submitted the following particulars :
Option 1 Option 2
1. Realisable Value [Sale at its [Sale as finished
present products after
condition] making
slight change
of design]
(a) Reilisable Price expected Rs. 30,000 Rs. 90,000
(b) Selling Commission payable 10% 10%
(c) Further processing cost for
finishing the products — RS. 24,000
(d) Additional cost for making a
change of design — Rs. 6,000
(e) Additional Labour hours required to complete production 80
2. Costs incurred so far
Cost of Design [original] Rs. 14,000
Cost of Materials Rs.38,000
Labour Hour Rate Rs. 40
Labour Hours used for the above products 120
Fixed Overhead—.
Actual Rs. 6,80,000
Budgeted Rs. 6,00,000
3. Other information related to the factory :
No. of Workers in the factory 20
No. of Working Hours per day 8
Normal Working Days during a year 300
Days lost for repairing breakdown of Machinery 50
Duty drawback on raw materials used Rs. 500
Please give your suggestion.

42 Fianancial Accounting
Solution
The inventory is to be valued at cost or at Net Realisable Value whichever becomes lower.
Now, the realisable values will be different if the products are sold (a) at as is where is
condition, that is, in their partly finished stage and (b) as finished products.
So, the costs and the net realisable values for both these forms should be ascertained as
follows

1. Ascertainment of Costs Option 1 (Rs.) Option 2 (Rs.)


[Partly finished goods] [FinishedProducts]
Cost of Materials 38,000 38,000
Cost of Design 14,000 20,000
Conversion Costs [120 x Rs. 57] 6,840 11,400
58,840 69,400
2. Ascertainment of Net Realisable Value Option 1 (Rs.) Option2 (Rs.)
Expected Selling Price 30000 90,000
Less : Selling Commission @ 10% 3,000 9,000
27,000 81,000
Less : Additional Cost for Completion
[6,000 + 24,000] — 30,000
27,000 51,000

The realisable values being lower than costs in each case, stock should be valued at Rs. 27,000
or at Rs. 51,000. But the second option will cause an inflow of cash to the extent of Rs.
51,000. So this amount should better be taken as the value of stock. The company should go
for the second option.

Note

Calculation of Conversion Costs

Actual Working Hours (annual) = No. of Workers x Daily Working Hours x [Normal Work-
ing Days — Day Lost for repairs] = 20 x 8 x [300 — 50] = 40,000

Fixed Overhead per Hour (Actual) = Rs. 6,80,000 / 40000 hrs. = Rs. 17

Conversion Cost per hour = Labour Cost + Fixed Overhead = Rs. 40 + Rs. 17 = Rs. 57

Financial Accounting 43
ACCOUNTING CONVENTION, AND PRACTICES

Illustration 4 :

X who was closing his books on 31.3.2008 failed to take the actual stock which he did only
on 9th April, 2008 when it was ascertained by him to be worth Rs. 25,000.

It was found that sales are entered in the sales book on the same day of despatch and return
inwards in the returns book as and when the goods are received back. Purchases are entered
in the Purchase Day Book once the invoices are received.

It was found that sales between 31.3.2008 and 9.4.2008 as per the sales day book are Rs.
1,720. Purchases between 31.3.2008 and 9.4.2008 as per Purchase Day Book are Rs. 120, out
of these goods amounting to Rs. 50 were not received until after the stock was taken.

Goods invoiced during the month of March, 2008 but goods received only on 4th April, 2008
amounted to Rs. 100. Rate of Gross Profit is 33 1/3% on cost.

Ascertain the value of stock as on 31.03.2008.

Mr. X
Statement showing Value of Stock on 31.03.2008

Particulars Amount Amount


Rs Rs.

Stock as on 9.4.2008
25,000
Add: Cost of Goods Sold between 31.03.2008 and 09.04.2008 :
Sales 1720
Less : Gross profit @1/4 th on selling price (i.e. 33 1/3% on cost) 430 1,290
26,290

Less : (a) Purchases made and goods actually received between


31.03.2008 and 09.04.2008
Purchases between these dates 120
Less : Goods not received till 09.04.2008 50 70
(b) Purchases related to March, 2008 but received on 04.04.2008 100 170
Stock on 31.03.2008 26,120

44 Fianancial Accounting
Illustration 5 :
The financial year of Mr. Chalaman ends on 31st March, 2008 but the stock in hand was
physically verified only on 8th April, 2008. You are required to determine the value of Clos-
ing Stock (at cost) as at 31st March, 2008 from the following information.
(i) The stock (valued at cost) as verified on 8th April, 2008 was Rs. 15,000.
(ii) Sales have been entered in the Sales Day Book only after the despatch of goods and sales
returns only on receipt of goods.
(iii) Purchases have been entered in the Purchase Day Book on receipt of the purchase in-
voice irrespective of the date of receipt of the goods.
(iv) Sales as per the sales day book for the period 1st April, 2008 to 8th April, 2008 (before
the actual verification) amounted to Rs. 6,000 of which goods of a sale value of Rs. 1,000
had not been delivered at the time of verification.
(v) Purchases as per the purchase day book for the period 1st April, 2008 to 8th April, 2008
(before the actual verification) amounted to Rs. 6,000 of which goods for purchases of
Rs. 1,500 had not been received at the date of verification and goods for purchases of
Rs. 2,000 had been received prior to 31st March, 2008.
(vi) In respect of goods costing Rs. 5.000 received prior to 31st March, 2008, invoices had
not been received up to the date of verification of stocks.
(vii) The gross profit is 20% on sales.
Mr. Chalaman
Solution Statement showing Value of Stock on 31.3.2008
Particulars Amount Amount
Rs. Rs.

Stock as on 8.4.08 15,000


Add :
(a) Cost of Goods Sold and sent Out between
1.4.08 and 8.4.08
Sales in this period . 6,000
Less: Goods sold but not delivered (at Selling Price) 1,000
5,000
Less : Gross Profit included [20% of 5,000] 1,000 4,000
19,000

Less :
(a) Goods purchased and received between
1.4.08 and 8.4.08 :
Purchases in this period 6,000
Less : Goods not received till 8.4.08 1,500 4,500
(b) Goods received before 31 .3.08 for which
the invoice is yet to be received 5,000
Stock on 31.3.2008 9,500

Financial Accounting 45
ACCOUNTING CONVENTION, AND PRACTICES

EXERCISE
Problem 1.
A firm closed its books annually on 31st March, 2008 but could carry out its physical stock
taking on 10th April following. The storekeeper disclosed the value of stock on 10.04.08 as
Rs. 45,000. You are to value its stock on 31.03.08 from the following
a. Purchases between 01.04.08 and 10.04.08 as per the Invoice Book amounted to Rs. 9,500.
You find that an office furniture purchased for Rs. 700 was recorded through the in-
voice book.Purchase book was carried forward Rs. 30 less on a certain page and a pur-
chase of Rs. 1,400 duly recorded in the books was still in transit.
b. Goods of Rs. 2,000 received on consignment were lying in stores and counted within the
physical stock taking.
c. Sales between 01.04.08 and 10.04.08 which amounted to Rs. 10,400 included (a) goods
sent on consignment at an invoice price of Rs. 1,000 which included a profit of 25% on
cost price,
d. Goods invoiced to branch at Rs. 420 which included a profit of 16% of sale, (c) Goods
sold for Rs. 800 at a loss of 20% of cost.
The firm normally sells goods at a profit of 25% on sales. Prepare a statement showing the
actual value of stock on 31.03.2008.
Problem 2.
Jyoti Prakash Ltd. makes up its accounts up to 31st December every year. It was able to take
stock by physical inventory only on 10th January, 2008, on which date the stock at cost was
valued at Rs. 2,05,000.
You asscertain the following regarding the period intervening between January 1 to January
10, 2008.
(a) Purchases totalled Rs. 58,000 and included (i) Rs. 13,000 in respect of goods received in
December, 2007, (ii) Rs. 6,000 in respect of goods received on 15th January, 2008 and
(iii) Rs. 2,000 in respect of goods received but returned to suppliers on January 9, 2008
for which no credit note has been received or passed through the books.
(b) Sales totalled Rs. 70,000 and included (i) Rs. 3,550 in respect of goods which left the
warehouse on 29th December, 2007, (ii) Rs. 3,000 in respect of goods which were not
despatched until 13th January 2008 and (iii) Rs. 2,000 in respect of goods invoiced and
05.01.2008 but returned by customers on January 8, 2008 for which no credit note had
been passed but which were, in fact, included in stock taken on 10th January, 2008.
(c) Other returns to suppliers totalled Rs. 2,700 and other returns by customers were Rs.
450.
(d) The rate of gross profit was 20% on selling price with the exception of an isolated pur-
chase on 5th December, 2007 of 10 identical articles which had cost Rs. 11,000. 5 Ar-
ticles out of these were sold on January 5, 2008 at a profit of Rs. 1,000. The remainder
had been included at Cost in Stock taken on 10.01.2008. Show the estimated value of
stock on 31st December, 2007.

46 Fianancial Accounting