1. © PHI Learning, 2008. All rights reserved.1 Financial Accounting: A Managerial Perspective Third Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

2. © PHI Learning, 2008. All rights reserved.2 Inventories Chapter 7

3. © PHI Learning, 2008. All rights reserved.3 Inventory Valuation and Income Measurement Defining inventories Goods meant for sale or for further processing Types of inventories Raw materials Work in progress Finished goods Matching inventory costs with revenues Effect of inventory errors Chapter 7

4. © PHI Learning, 2008. All rights reserved.4 Determining the Physical Inventory Importance of taking physical inventory Procedure for taking inventory Goods in transit Shipping terms and passing of property Goods on consignment Chapter 7

5. © PHI Learning, 2008. All rights reserved.5 Pricing the Inventory Cost basis Inventoriable costs or product costs Period costs Inventory costing methods Physical flow and cost flow Specific identification First-in, first-out Last-in, first-out Weighted-average cost Chapter 7

6. © PHI Learning, 2008. All rights reserved.6 Pricing the Inventory continued Comparison of alternative methods Managerial motivations in selection Other inventory cost methods Standard cost Base stock Inventory profits The lower-of-cost or market (LCM) rule The conservatism principle and prudence The consistency principle Chapter 7

7. © PHI Learning, 2008. All rights reserved.7 Estimating Inventory Value When is inventory value estimated Methods of estimating inventory value Retail inventory method Retail to cost ratio Assumptions Gross profit method Gross profit ratio Assumptions Chapter 7

8. © PHI Learning, 2008. All rights reserved.8 Perpetual Inventory System What is the perpetual inventory system? How is it different from the periodic inventory system? Recording accounting entries Maintaining perpetual inventory records Internal control and perpetual inventory system Chapter 7

9. © PHI Learning, 2008. All rights reserved.9 Accounting for Manufacturing Costs Cost of goods manufactured Raw materials consumed Direct labour Manufacturing overhead Direct costing and absorption costing Cost of goods sold Chapter 7

10. © PHI Learning, 2008. All rights reserved.10 Reporting Inventories under the Companies Act Companies (Auditors Report) Order 2003 Periodical physical verification of inventory Adequacy of physical verification Maintenance of proper records for inventories Adequacy of internal control procedure Chapter 7

11. © PHI Learning, 2008. All rights reserved.11 Financial Analysis of Inventories Inventory turnover ratio Interpreting the inventory turnover ratio in financial analysis Chapter 7