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Valuation of Inventory

Physical verification of inventory was done on 23rd June. The value of inventory was Rs.4,80,000. Following transactions took place between 23rd June and 30th June:
1. Out of goods sent on consignment, goods costing Rs. 24,000 were unsold.
2. Purchases of Rs.40,000 were made, out of which goods worth Rs.16,000 were delivered on 5th July.
3. Sales were Rs.1,36,000, which include goods worth Rs.32,000 sent on approval. Half of these goods were returned before 30th June, but no intimation is available regarding the remaining goods. Goods are sold at cost plus 25%. However, goods costing Rs.24,000 had been sold for Rs.12,000. You want to determine the value of inventory on 30th June. You start with physical inventory on 23rd June.
Cost of Normal Sales = _______.
a) 73,600 b) 80,000 c) 1,08,800 d) 99,200
How will you deal with adjustments 1, 2 and 3?

asked Apr 24, 2016 in Inventories. by Divyansh (6 points) 463 views

1 Answer

+1 vote
Best answer

Adjustment No. 1:  This means business has received information during the period 23rd June to 30th June that goods worth Rs.24000 sent by them on consignment basis remain unsold.  Actually these goods were sent before 23rd June.  So the goods  sent on consignment which remain unsold are a part of the inventory, hence shall be added to Rs.480000 to find out the value of inventory on 30th June.

Adjustment No. 2.  Goods bought during the given period amount to Rs.40000.  Out of these goods, goods worth Rs.16000 were received on 5th July.  Though goods worth Rs.16000 were not in our physical possession but we owned them, hence they will form part of inventory as on 30th June.  Hence complete value of purchases during this period i.e. Rs.40000 will be added to Rs.480000 to find out the value of inventory on 30th June.

Adjustment No. 3.  

    4.             Cost of Normal Sales is Rs.73600.

answered Apr 24, 2016 by jbsclasses (3,971 points)
selected Apr 24, 2016 by Divyansh
Why have you deducted the cost of sales on approval basis in the adjustment 3 ? 40000 should be deducted instead of 32000.

1.         ‘Sales were Rs.1,36,000, which include goods worth Rs.32,000 sent on approval’.  In this sentence we are talking about sales, obviously all the references in this will be at sale price unless specifically mentioned otherwise.  That is why Rs.32000 has been deducted and not Rs.40000.

2.         Goods worth Rs.32000 were part of the goods physically verified (Rs.480000) on 23rd June.  Goods worth Rs.16000 were sent out and came back before 30th June.  So on 30th June they remain part of Rs.480000.  That is why that has been deducted from sale of Rs.136000 because that is not sold.  Balance goods worth Rs.16000 are lying with the customer.  He has not confirmed sales as on 30th June.  It means these goods should also form party of inventory as on 30th June.  That is why this has also been deducted from the sales figure of Rs.136000.

            One thing you must remember is that goods whether lying with us or customers are our goods and will be shown in the Balance Sheet.

What does goods 'worth' 32000 mean ?

'Meaning of 'worth' could be cost price as well as sales price, it depends on the context.  In the present question ('Sales were Rs.1,36,000, which include goods worth Rs.32,000 sent on approval.') we are talking about sales of Rs.136000, which includes goods worth Rs.32000.  The question is referring to a part of sales, hence 'worth' here means sale price.