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Inventory valuation as per income tax & as per company law

Urjeet Modi (MT) (48 Points)

13 April 2016

HI,

Any one Have idea about the Inventory Valuation as per the Companies Act and as per the Income Tax Act. Please provide the Expample.

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4 Replies

AjinkyaK (Student CA Final ) (34 Points)
Replied 13 April 2016

Dear Urjeet,

Inventory should be generally valued at the lower of Cost and Net Realizable Value.
And the cost methods are FIFO method , LIFO method , Weighted Average method , Average method, Base stock method etc.
As per companies Act valuations of each class of goods i.e raw material, finished goods, WIP are to be disclosed in financial statements. Also the accounting policies adopted in measuring inventories need to be disclosed.

And there can be many examples and that depends upon the method which is to be adopted i.e FIFO, Weighted Average method etc. Lets take FIFO method example---

Following are the details of purchases.
Date Qty Rate/unit (Rs.)

1/4 1000 8

2/4 500 9

3/4 1500 7.50

And 2000 units are sold.

Thus , as 2000 units are sold our closing stock is 1000 units. But how to find its value ? there comes the role of FIFO method.
Breakup of 2000 units sold---

First 1000 units from purchases of 1st April

then 500 units from purchases of 2nd April

and 500 from purchases of 3rd April. (The reason we are following this sequnce is due to FIFO method. If we had followed LIFO then it had been opposite way)

Now stock of 1000 units remained i.e from 3rd April purchases. And cost of 3rd April purch.is Rs.7.50/unit.

So, 1000*7.50= Rs. 7500 (Value of Stock)

Many such examples based on various methods can be made. Hope your query is resolved Urjeet.

All the best!!!

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Urjeet Modi (MT) (48 Points)
Replied 13 April 2016

Thanks for the Guidance ...... I think Cenvat Portion is also added in the Invenory Valuation as per IT Act is this correct.

AjinkyaK (Student CA Final ) (34 Points)
Replied 13 April 2016

Urjeet, Cenvat Rules were introduced which provided for credit of duty paid on inputs to reduce tax burden and various other benefits. Assuming that by saying cenvat portion is added in Invenory Valuation you mean it is included in cost then its a NO!

According to AS-2 Valuation of Inventories, the duties and taxes like Cenvatable excise duty need to be deducted from cost of purchase as they are subsequently recovered.