ACCOUNTING

STANDARDS

CA AVINASH SANCHETI 1
CA AVINASH SANCHETI 2
I dedicate this book to my grandfather Late Nagraj Ji Sancheti, my inspirational
source - my father Mr. Rajendra Kumar Sancheti, my family, friends and students.
This book is designed in a way that covers learning, understanding and problem
solving at one place with illustrations at the end of each concept. This book contains
all comprehensive problems on Accounting Standards (from ICAI study materials,
Practice Manual, Past papers and other references) and an illustrative text of each
standard.

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 CONTENTS
Sl. No. Content Pages
1 Introduction to Accounting Standards 9 – 14
2 AS – 1 Disclosure of Accounting Policies 15 – 30
3 AS – 2 Valuation of Inventories 31 – 52
4 AS – 10 Property, Plant & Equipment 53 – 100
5 AS – 11 Effects of changes in Foreign Exchange Rates 101– 120
6 AS – 12 Government Grants 121 – 140
7 AS – 16 Borrowing Costs 141 – 166
- Space for Notes 167 - 170

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 IMPORTANT POINTS
Question Reply

Tentative Marks

Type of questions

Do I need to learn AS by
heart

Are AS theoretical?

How to write answer for

case based question

How to write answer for

numerical question

Study methodology

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 INTRODUCTION TO ACCOUNTING STANDARDS
Meaning
Accounting Standards (AS) are written policy documents issued by expert accounting body or by
government or other regulatory body covering the aspects of recognition, measurement,
presentation and disclosure of accounting transactions in the financial statements.

Issues dealt with by AS

1) recognition of events and transactions in the financial statements,
2) measurement of these transactions and events,
3) presentation of these transactions and events in the financial statements in a manner that is
meaningful and understandable to the reader, and
4) the disclosure requirements which should be there to enable the public at large and the
stakeholders and the potential investors in particular, to get an insight into what these financial
statements are trying to reflect and thereby facilitating them to take prudent and informed
business decisions.

Benefits of AS
I. Standardisation of alternative accounting treatments: Standards reduce to a reasonable
extent or eliminate altogether confusing variations in the accounting treatments used to
prepare financial statements.
II. Requirements for additional disclosures: There are certain areas where important information
are not statutorily required to be disclosed. Standards may call for disclosure beyond that
required by law.
III. Comparability of financial statements: The application of accounting standards would, to a
limited extent, facilitate comparison of financial statements of companies situated in different
parts of the world and also of different companies situated in the same country.

Limitations of AS
I. Difficulties in making choice between different treatments: Alternative solutions to certain
accounting problems may each have arguments to recommend them. Therefore, the choice
between different alternative accounting treatments may become difficult.
II. Lack of flexibilities: There may be a trend towards rigidity and away from flexibility in applying
the accounting standards.
III. Restricted scope: Accounting standards cannot override the statute. The standards are
required to be framed within the ambit of prevailing statutes.

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Standard Setting Process
Identification of Area by ASB(ICAI)

Constitution of study group

Preparation of draft and its circulation

Ascertainment of views of different bodies on draft

Finalisation of exposure draft

Comments received on Exposure draft

Modification of draft

Issue of AS

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Applicability of AS on various entities
Corporate Entities
SMCs Non - SMCs
1) whose equity or debt securities are not listed Companies not falling within the definition of SMC.
or are not in the process of listing on any stock
exchange, whether in India or outside India;
2) which is not a bank, financial institution or an
insurance company;
3) whose turnover (excluding other income) does
not exceed rupees fifty crores in the immediately
preceding accounting year;
4) which does not have borrowings (including public
deposits) in excess of rupees ten crores at any time
during the immediately preceding accounting year;
and
5) which is not a holding or subsidiary company of a
company which is not a small and medium-sized
company.
Applicability: All AS are applicable in entirety
1) Entirety - AS – 1, 2, 4, 5, 7, 9, 10, 11, 12, 13, 14,
16, 18, 22, 24, 26
2) Subject to relaxations - AS – 15, 19, 20, 28, 29
3) Non – applicable - AS – 3, 17

Non - Corporate Entities

Level I Level II Level III
1) whose equity or debt securities 1) Entities other than Level I Entities which are not
are listed or in the process of listing entities covered under Level I or Level
on any stock exchange, whether in 2) All commercial, industrial and II category.
India or outside India; business reporting entities, whose
2) which is a bank, financial turnover (excluding other income)
institution or an insurance exceeds rupees one crore but does
company; not exceed rupees fifty crore in
3) whose turnover (excluding other the immediately preceding
income) exceed rupees fifty crorein accounting year;
the immediately preceding 3) All commercial, industrial and
accounting year; business reporting entities having
4) which have borrowings (including borrowings (including public
public deposits) in excess of rupees deposits) in excess of rupees one
ten crore at any time during the crore but not in excess of rupees
immediately preceding accounting ten crore at any time during the
year; and immediately preceding accounting
5) which is a holding or subsidiary year;
of any of the above entities. 4) Holding and subsidiary entities
of any one of the above.
All AS are applicable in entirety. Applicability: Applicability:
1) Entirety - AS – 1, 2, 4, 5, 7, 9, 10, 1) Entirety - AS – 1, 2, 4, 5, 7,
11, 12, 13, 14, 16, 18, 22, 24, 26 9, 10, 11, 12, 13, 14, 16, 22, 26
2) Subject to relaxations - AS – 15, 2) Subject to relaxations - AS
19, 20, 28, 29 – 15, 19, 20, 28, 29
3) Non – applicable - AS – 3, 17 3) Non – applicable - AS – 3,
17, 18, 24

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IND-AS
Indian Accounting Standards (Ind AS) are IFRS converged standards issued by the Central
Government of India under the supervision and control of Accounting Standards Board (ASB) of
ICAI and in consultation with National Advisory Committeeon Accounting Standards (NACAS).
Ind AS are named and numbered in the same way as the corresponding International Financial
Reporting Standards (IFRS).
Benefits of convergence to IND-AS
Globalization & Transparency of Comparability of Enhanced
Liberalization Financial Statements Financial Statements DisclosureS

Convergence & Carve-outs

The Government of India in consultation with the ICAI decided to converge and not to adopt IFRS
issued by the IASB. The decision of convergence rather than adoption was taken after the detailed
analysis of IFRS requirements and extensive discussion with various stakeholders.
Accordingly, while formulating IFRS converged Indian Accounting Standards (Ind AS), efforts have
been made to keep these Standards, as far as possible, in line with the corresponding IAS/IFRS and
departures have been made where considered absolutely essential. These changes have been made
considering various factors, such as
➢ Various terminology related changes have been made to make it consistent with the
terminology used in law, e.g., ‘statement of profit and loss’ in place of ‘statement of
comprehensive income’ and ‘balance sheet’ in place of ‘statement of financial position’.
➢ Removal of options in accounting principles and practices in Ind AS vis-à-vis IFRS, have been
made to maintain consistency and comparability of the financial statements to be prepared by
following Ind AS. However, these changes will not result into carve outs.
➢ Certain changes have been made considering the economic environment of the country,
which is different as compared to the economic environment presumed to be in existence
by IFRS. These differences are due to differences in economic conditions prevailing in India.
These differences which are in deviation to the accounting principles and practices stated in
IFRS, are commonly known as ‘Carve-outs’.

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Roadmap for Implementation of IND-AS
For Companies other than NBFCs, Banks & Insurance Cos
1st April, 2015 1st April, 2016 1st April, 2017
Voluntary Basis Mandatory Basis Mandatory Basis
Any Company Listed Cos or Cos in process of All Listed Cos or Cos in
listing having Net worth > ₹500 process of listing
crores Unlisted Cos having Net
Unlisted Cos having Net worth worth > ₹250 crores
> ₹500 crores Parent, Subsidiary,
Parent, Subsidiary, Associate Associate & JV of above
& JV of above
Note:
1) Cos listed on SME Exchange are not required to apply Ind AS.
2) Once Ind AS are applicable, entity shall follow the Ind AS for all subsequent Financial
Statements.
3) Companies not covered under this roadmap shall continue to apply Accounting Standards.

For NBFCs
1st April, 2018 1st April, 2019
Mandatory Basis Mandatory Basis
Listed Cos or Cos in process of listing All Listed Cos or Cos in process of listing
having Net worth > ₹500 crores Unlisted Cos having Net worth > ₹250
Unlisted Cos having Net worth > ₹500 crores
crores Parent, Subsidiary, Associate & JV of
Parent, Subsidiary, Associate & JV of above
above
Note:
1) Companies not covered under this roadmap shall continue to apply Accounting Standards.
2) Voluntary adoption of Ind AS is not allowed.

For Scheduled Commercial Banks & Insurance Cos

1st April, 2018
Mandatory Basis
All Banks & Insurance Cos
Parent, Subsidiary, Associate & JV of above
Note: Urban Cooperative Banks & Regional Rural Banks are not required to apply Ind AS.

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 SELF TEST QUESTIONS
Question 1
What are the issues, with which Accounting Standards deal?
Question 2
What are the benefits and limitations of Accounting Standards?
Question 3
“Accounting standards standardize diverse accounting policies with aview to eliminate the non-
comparability of financial statements and improve the reliability of financial statements.” Discuss
and explain the benefits of Accounting standards?
Question 4
What are the main reasons for adoption of Ind AS in India?

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AS-1 DISCLOSURE OF ACCOUNTING POLICIES
Applicability
This Accounting standard is applicable to all entities.

Accounting Policy
The accounting policies refer to the specific accounting principles and the methods of applying
those principles adopted by the enterprise in the preparation and presentation of financial
statements.
EXPLANATION

Areas where different accounting policies can be adopted

1) Valuation of Inventories – FIFO, Weighted Average etc.
2) Valuation of Investments
3) Determination of Carrying amount of Property, Plant & Equipment
4) Valuation of Goodwill
5) Treatment of Foreign exchange fluctuation gain\loss etc.

Manner of Disclosure
All significant accounting policies adopted in the preparation and presentation of financial
statements should be disclosed. The disclosure of the significant accounting policies as such should
form part of the financial statements and the significant accounting policies should normally be
disclosed in one place.
EXPLANATION

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Selection of Accounting Policies
1) True & Fair view – Accounting policies shall be selected in a manner that it present a true and
fair view of the financial performance and position of business entity.
2) Prudence - In view of uncertainty associated with future events, profits are not anticipated, but
losses are provided for as a matter of conservatism. The exercise of prudence in selection of
accounting policies ensure that (i) profits are not overstated (ii) losses are not understated (iii)
assets are not overstated and (iv) liabilities are not understated.
3) Substance over form - Transactions and other events should be accounted for and presented in
accordance with their substance and financial reality and not merely with their legal form.
4) Materiality - Financial statements should disclose all ‘material items, i.e. the items the
knowledge of which might influence the decisions of the user of the financial statement.
EXPLANATION

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Question 1
V Ltd. purchases goods on behalf of its customers for execution of work under a Works contract
against which it receives full payment and necessary declaration form under GST Act to be passed
on to the supplier. The Company follows the practise of treating the same as its Purchases and
accordingly debits it to Profit & Loss A/c. Give your views on the above.
ANSWER

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Fundamental Accounting Assumptions
Going Concern Consistency Accrual
Enterprise will continue its It refers to the practice of Under this basis of
operations in the foreseeable using same accounting policies accounting, transactions are
future and neither there is for similar transactions in all recognised as soon as they
intention, nor there is need to accounting periods. occur, whether or not cash or
materially curtail the scale of cash equivalent is actually
operations. received or paid.
The above three concepts are fundamental assumptions of Accounting i.e. they are being
followed by every accountant while preparing financial statements. If the above assumptions
are followed, no separate disclosure is required but if the above assumptions are not followed,
the fact must be disclosed in the financial statement.
EXPLANATION

Disclosure of changes in accounting policy

Accounting policies once adopted must be followed consistently over various accounting periods
and shall not be changed unless the change is required due to: a) Change in statute; b) Change in
accounting standard and c) for better presentation of accounting information.
Any change in the accounting policies which has a material effect in the current period or which is
reasonably expected to have a material effect in a later period should be disclosed. In the case of a
change in accounting policies, which has a material effect in the current period, the amount by
which any item in the financial statements is affected by such change should also be disclosed to
the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should
be indicated.

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 EXPLANATION

Question 2
In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to ₹1,63,000 (on the
basis of FIFO method). The company decides to change from FIFO method to weighted average
method for ascertaining the cost of inventory from the year 2014-15. On the basis of weighted
average method, closing inventory as on 31.03.2015 amounts to ₹1,47,000. Realisable value of the
inventory as on 31.03.2015 amounts to ₹1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS-1.

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 ANSWER

Question 3
Jagannath Ltd. had made a rights issue of shares in 2017. In the offer document to its members, it
had projected a surplus of ₹40 crores during the accounting year to end on 31st March, 2017. The
draft results for the year, prepared on the hitherto followed accounting policies and presented for
perusal of the board of directors showed a deficit of ₹10 crores. The board in consultation with the
managing director, decided on the following:
➢ Value year-end inventory at works cost (₹50 crores) instead of the hitherto method of
valuation of inventory at prime cost (₹30 crores).
➢ Not to provide for “after sales expenses” during the warranty period. Till the last year,
provision at 2% of sales used to be made under the concept of “matching of costs against
revenue” and actual expenses used to be charged against the provision. The board now
decided to account for expenses as and when actually incurred. Sales during the year total to
₹600 crores.
➢ Provide for permanent fall in the value of investments - which fall had taken place over the past
five years - the provision being ₹10 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes on
accounts for inclusion in the annual report for 2016-2017.

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 ANSWER

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Question 4
XYZ Company is engaged in the business of financial services and is undergoing tight liquidity
position, since most of the assets of the company are blocked in various claims/ petitions in a
Special Court. XYZ has accepted Inter-Corporate Deposits (ICDs) and, it is making its best efforts to
settle the dues. There were claims at varied rates of interest, from lenders, from the due date of
ICDs to the date of repayment. The company has provided interest, as per the terms of the contract
till the due date and a note for non provision of interest on the due date to date of repayment was
affected in the financial
statements. On account of uncertainties existing regarding the determination of the amount and in
the absence of any specific legal obligation at present as per the terms of contracts, the company
considers that these claims are in the nature of "claims against the company not acknowledged as
debt”, and the same has been disclosed by way of a note in the accounts instead of making a
provision in the profit and loss accounts. State whether the treatment done by the Company is
correct or not.
ANSWER

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Question 5
State whether the following statements are ‘True’ or ‘False’. Also give reason for your answer:
a) Certain fundamental accounting assumptions underline the preparation and presentation of
financial statements. They are usually specifically stated because their acceptance and use are
not assumed.
b) If fundamental accounting assumptions are not followed in presentation and preparation of
financial statements, a specific disclosure is not required.
c) All significant accounting policies adopted in the preparation and presentation of financial
statements should form part of financial statements.
d) Any change in accounting policy, which has a material effect should be disclosed. Where the
amount by which any item in the financial statements is affected by such change is not
ascertainable, wholly or in part, the fact need not to be indicated.
ANSWER

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Question 6
Balance Sheet of Anurag Trading Co. on 31st March, 2017 is given below:
Liabilities Amount (₹) Assets Amount (₹)
Capital 50,000 Fixed Assets 69,000
Profit & Loss A\c 22,000 Stock in trade 36,000
10% Loan 43,000 Trade Receivables 10,000
Trade Payables 18,000 Deferred Expenditure 15,000
Bank 3,000
1,33,000 1,33,000
Additional Information:
1. Remaining life of fixed assets is 5 years with even use. The net realisable value of fixed assets as
on 31st March, 2018 was ₹64,000.
2. Firm’s Sales and purchases for the year 2017-18 amounted to ₹5 lakhs and ₹4.50 lakhs
respectively.
3. The cost and NRV of stock were ₹34,000 and ₹38,000 respectively.
4. General expenses for the year amounted to ₹16,500.
5. Deferred Expenditure is normally amortised equally over 4 years starting from F.Y. 2016-17 i.e.
₹5,000 p.a.
6. Out of debtors worth ₹10,000, collection of ₹4,000 depend on successful redesign of certain
product already supplied to customer.
7. Closing trade payable is ₹10,000, which is likely to be settled at 95%.
8. There is pre-payment penalty of ₹2,000 for Bank loan outstanding.
Prepare Profit & Loss A\c for the year ended 31st March, 2018 under the two cases:
a) Firm is a going concern
b) Firm is not a going concern.
ANSWER

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Question 7
HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the last
12 months upto 31.03.2017. The Company now wants to make provision based on technical
evaluation during the year ending 31.03.2018.
Total value of stock ₹120 lakhs
Provision required based on technical evaluation ₹3 lakhs
Provision required based on 12 months no issue ₹4 lakhs
You are requested to discuss the following points in the light of AS-1:
a) Does this amount to change in accounting policy?
b) Can the company change the method of accounting?
ANSWER

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 Concept Summary

AS-1 deals with

Accounting Policy

Areas where different

accounting policies can
be adopted

Selection of Accounting
policies

Disclosure of Accounting
policies

Changes in Accouting
policies

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Fundamental Accounting
Assumption

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 SELF TEST QUESTIONS
Question 1
What are the three fundamental accounting assumptions recognised by Accounting Standard (AS)
1? Briefly describe each one of them.
Question 2
Mention few areas in which different accounting policies are followed by companies?
Question 3
Under what circumstances can an enterprise change its accounting policy?

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 Space for Self Notes

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 AS – 2 VALUATION OF INVENTORIES
Applicability
This Accounting standard is applicable to all entities.

Objective of AS – 2
A primary issue in accounting for inventories is the determination of the value at which inventories
are carried in the financial statements until the related revenues are recognised. This standard deals
with:
a) Determination of Value of Inventory;
b) Ascertainment of Cost of Inventory; and
c) Writing down to Net Realisable Value.

Meaning of Inventory
Inventories are assets:
a) held for sale in the ordinary course of business; (Finished Goods purchased by retailer for
resale)
b) in the process of production for such sale; or (Raw materials & Work-in-progress)
c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services.(loose tools, maintenance supplies etc.)
EXPLANATION

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Measurement of Inventories
W.I.P & Finished Goods
Inventories should be valued at Cost or Net Realisable Value (NRV); whichever is lower.
Inventories are usually written down to net realisable value on an item-by-item basis.It is not
appropriate to write down inventories based on a classification of inventory (Global basis), for
example, finished goods, or all the inventories in a particular business segment.
EXPLANATION

Question 1
Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor interchangeable. At
the time of closing of its accounts for the year ending 31 st March 2010, the historical cost and net
realizable value of the items of the closing stock are determined as follows:
Items Historical Cost (₹) Net Realisable Value (₹)
P 5,70,000 4,75,000
Q 9,80,000 10,32,000
R 3,16,000 2,89,000
S 4,25,000 4,25,000
T 1,60,000 2,15,000
What will be the value of closing stock for the year ending 31 stMarch, 2012 as per AS 2 “Valuation of
Inventories”?
ANSWER

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Raw Material
Materials and other supplies held for use in the production of inventories are valued at cost.
However, when there has been a decline in the price of materials and it is estimated that the cost
of the finished products will exceed net realisable value, the materials are written down to net
realisable value. In such circumstances, the replacement cost of the materials may be the best
available measure of their net realisable value.
EXPLANATION

Cost of Inventories
The cost of inventories should comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition.
Cost of Purchase
It includes:
a) Purchase price;
b) Duties and taxes (other than those subsequently recoverable);
c) Freight and other expenses directly attributable to acquisition.
Note: Trade discounts, rebates, duty drawbacks and other similar items are deducted in
determining the costs of purchase.

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Cost of Conversion
It includes:
a) Cost directly related to production (like Direct labour, cost of design etc.)
b) Variable Overhead - assigned to each unit of production on the basis of the actual use of the
production facilities.
c) Fixed Overhead - absorbed systematically to units of production over normal capacity.
Note:
The amount of fixed production overheads allocated to each unit of production should not be
increased as a consequence of low production or idle plant. Unallocated overheads (i.e. under
recovery) are recognised as an expense in the period in which they are incurred. In periods of
abnormally high production, the amount of fixed production overheads allocated to each unit of
production is decreased so that inventories are not measured above cost.

Other costs
These are included in cost of inventory to the extent they are directly attributable\related to bring
the inventory to its present location and condition.

Exclusion from Cost

In determining the cost of inventories, it is appropriate to exclude certain costs and recognise them
as expenses in the period in which they are incurred. Examples of such costs are:
a) Abnormal amounts of wasted materials, labour, or other production costs;
b) Storage costs, unless the production process requires such storage;
c) Administrative overheads that do not contribute to bringing the inventories to their present
location and condition;
d) Selling and distributions costs;
e) Interest and other borrowing costs.
Note: Normal Loss shall always will included in computation of cost of inventory.
EXPLANATION

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Question 2
You are required to value the inventory per kg of finished goods consisting of:
Item of Cost ₹ per kg
Material 200
Labour 40
Direct variable overhead 20
Fixed production charges for the year on normal working capacity of 2 lakh kgs is ₹20 lakhs. 4,000
kgs of finished goods are in stock at the year end.
ANSWER

Question 3
An enterprise ordered 13,000 Kg. of certain material at ₹90 per unit. The purchase price includes
excise duty ₹5 per Kg., in respect of which full CENVAT credit is admissible. Freight incurred
amounted to ₹80,600. Normal transit loss is 4%. The enterprise actually received 12,400 Kg and
consumed 10,000 Kg. Determine the cost of Inventory and its allocation into Materials consumed,
Closing inventory and Abnormal loss?
ANSWER

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Question 4
Normal production volume of Rama Ltd. Is 1,00,000 units. Estimated fixed overheads are ₹5,00,000.
Calculate fixed overhead per unit to be absorbed when actual production is (i) 1,00,000 units; (ii)
80,000 units and (iii) 1,20,000 units and find out unabsorbed amount to be transferred to P&L in all
the situations?
ANSWER

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Question 5
The company X Ltd., has to pay for delay in cotton clearing charges. The company up to 31.3.2014
has included such charges in the valuation of closing stock. This being in the nature of interest, X
Ltd. decided to exclude such charges from closing stock for the year 2014-15. This would result in
decrease in profit by ₹5 lakhs. Comment.
ANSWER

Joint Products & By-Products

A production process may result in more than one product being produced simultaneously. This is
the case, for example, when joint products are produced or when there is a main product and a by-
product. When the costs of conversion of each product are not separately identifiable, they are
allocated between the products on a rational and consistent basis. The allocation may be based, for
example, on the relative sales value of each product either at the stage in the production process
when the products become separately identifiable, or at the completion of production.
Most by-products as well as scrap or waste materials, by their nature, are immaterial. When this is
the case, they are often measured at net realisable value and this value is deducted from the cost of
the main product. As a result, the carrying amount of the main product is not materially different
from its cost.

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 EXPLANATION

Question 6
During the production of main product Bomex, a by-product Brucil is also produced. Total cost of
conversion is ₹3,85,000 and 1,25,000 units of Bomex and 7,000 units of Brucil arise from the
process. Brucil can be sold for ₹5 per unit. Calculate the cost of conversion of Bomex?
ANSWER

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Question 7
In a manufacturing process of Vijaya Ltd., one by-product BP emerges besides two main products
MP1 and MP2 apart from scrap. Details of cost of production process is here under:
Item Units Amount (₹) Output (unit) Closing stock
Raw Material 15,000 1,60,000 MP1 – 6,250 800
Wages - 82,000 MP2 – 5,000 200
Fixed Overhead - 58,000 BP – 1,600 -
Variable overhead - 40,000 - -
Average market price of MP1 and MP2 is ₹80/unit and ₹50/unit respectively. By-product is sold at
₹25/unit. There is a profit of ₹5,000 on sale of by-product after incurring separate processing
charges of ₹4,000 and packing charges of ₹6,000. ₹6,000 realised from sale of scrap. Calculate the
value of Closing stock of MP1 and MP2?
ANSWER

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Net Realisable Value
Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
Estimates of net realisable value are based on the most reliable evidence available at the time the
estimates are made as to the amount the inventories are expected to realise.
Estimates of net realisable value also take into consideration the purpose for which the inventory
is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or
service contracts is based on the contract price. If the sales contracts are for less than the inventory
quantities held, the net realisable value of the excess inventory is based on general selling prices.
EXPLANATION

Question 8
Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-
2015. His factory produces Product X using Raw material A.
a. 600 units of Raw material A (purchased @ ₹120). Replacement cost of raw material A as on 31-
3-2015 is ₹90 per unit.
b. 500 units of partly finished goods in the process of producing X and cost incurred till date ₹260
per unit. These units can be finished next year by incurring additional cost of ₹60 per unit.
c. 1500 units of finished Product X and total cost incurred ₹320 per unit. Expected selling price of
Product X is ₹300 per unit.
Determine how each item of inventory will be valued as on 31-3-2015. Also calculate the value of
total inventory as on 31-3-2015.

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 ANSWER

Question 9
Calculate the value of raw materials and closing stock based on the following information:
Particulars Amount (₹)
Raw Material X
Closing Balance 500 units
₹ per unit
Cost price including excise duty 200
Excise Duty (Cenvat credit is receivable) 10
Freight Inward 20
Unloading Charges 10
Replacement Cost 150
Finished Goods Y
Closing Balance 1,200 units
₹ per unit
Material Consumed 220
Direct Labour 60
Direct Overhead 40

CA AVINASH SANCHETI 42
Total Fixed overhead for the year was ₹2,00,000 on normal capacity of 20,000 units.
Calculate the value of the closing stock, when:
1) Net Realizable Value of the Finished Goods Y is ₹400.
2) Net Realizable Value of the Finished Goods Y is ₹300.
ANSWER

CA AVINASH SANCHETI 43
Question 10
Item of Cost Kg ₹
Opening Inventory:
Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labour - 76,500
Fixed overhead - 75,000
Sales 10,000 2,80,000
Closing Inventory:
Finished Goods 900 ?
Raw Materials 1,200 ?
The expected production for the year was 15,000 kg of the finished product. Due to fall in market
demand the sales price for the finished goods was ₹20 per kg and the replacement cost for the raw
material was ₹9.5 per kg on the closing day. You are required to calculate the value of closing stock?
ANSWER

CA AVINASH SANCHETI 44
Cost Formula
Mostly inventories are purchased / made in different lots and unit cost of each lot frequently differs.
In all such circumstances, determination of closing inventory cost requires identification of units in
stock to have come from a particular lot. This specific identification is best wherever possible. In all
other cases, the cost of inventory should be determined by the First-In First-Out (FIFO), or Weighted
Average cost formula. The formula used should reflect the fairest possible approximation to the
cost incurred in bringing the items of inventory to their present location and condition.
Instead of actual, the standard costs may be taken as cost of inventory provided standards fairly
approximate the actual.
In retail business, where a large number of rapidly changing items are traded, the actual costs of
items may be difficult to determine. The units dealt by a retailer however, are usually sold for similar
gross margins and a retail method to determine cost in such retail trades makes use of the fact. By
this method, cost of inventory is determined by reducing sale value of unsold stock by
appropriate average percentage of gross margin.
EXPLANATION

CA AVINASH SANCHETI 45
Question 11
HP is a leading distributor of petrol. A detail inventory of petrol in hand is taken when the books are
closed at the end of each month. At the end of month following information is available:
Sales ₹47,25,000
General overheads cost ₹1,25,000
Inventory at beginning 1,00,000 litres @ 15 per litre
Purchases:
June 1 - 2 lakh litres @ ₹ 14.25
June 30 - 1 lakh litres @ ₹ 15.15
Closing inventory 1.30 lakh litres
Compute the following by the FIFO as per AS 2:
a. Value of Inventory on June, 30.
b. Amount of cost of goods sold for June.
c. Profit/Loss for the month of June.
ANSWER

CA AVINASH SANCHETI 46
Question 12
From the following information, ascertain the value of stock as on 31 st March, 2012:
Particulars ₹
Stock as on 01-04-2011 28,500
Purchases 1,52,500
Manufacturing Expenses 30,000
Selling Expenses 12,100
Administration Expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31st March, 2011 a sum of ₹3,500 was written off on a particular
item, which was originally purchased for ₹10,000 and was sold during the year for ₹9,000. Barring
the transaction relating to this item, the gross profit earned during the year was 20% on sales.
ANSWER

CA AVINASH SANCHETI 47
Question 13
Shri Ganesh operates a retail business. For a financial year, the following data is given:
Particulars Selling price Cost price
Value of Opening Stock ₹80,000 ₹60,000
Purchases ₹1,40,000 ₹1,20,000
Calculate the cost of closing stock using Retail method, if Sales made during the year is ₹2,00,000.
ANSWER

Disclosure
The financial statements should disclose:
a) the accounting policies adopted in measuring inventories, including the cost formula used;
b) the total carrying amount of inventories and its classification appropriate to the enterprise.

Scope (Exclusions from AS – 2)

This Standard should be applied in accounting for inventories other than:
a) work in progress arising under construction contracts, including directly related service
contracts (Accounting Standard (AS) 7, Construction Contracts);
b) work in progress arising in the ordinary course of business of service providers;
c) shares, debentures and other financial instruments held as stock-in-trade; and
d) producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores
and gases to the extent that they are measured at net realisable value in accordance with
well- established practices in those industries.

CA AVINASH SANCHETI 48
 Concept Summary

Inventory

Accounting for Inventory

Determination of Cost of
inventory

Cost of Joint products &

By products

Effect of Normal &

Abnormal Loss

CA AVINASH SANCHETI 49
 Exclusions from Cost

Valuation of Inventory

Net realisable value

Cost Formula

Retail inventory method

Exclusions from AS-2

CA AVINASH SANCHETI 50
 SELF TEST QUESTIONS
Question 1
Cost of a partly finished unit at the end of 2009-10 is ₹150. The unit can be finished next year by a
further expenditure of ₹100. The finished unit can be sold at ₹250, subject to payment of 4%
brokerage on selling price. Determine the value of Inventory?

Question 2
A trader purchased certain articles for ₹85,000. He sold some of articles for ₹1,05,000. The average
percentage of gross margin is 25% on cost. Opening stock of inventory at cost was ₹15,000. Find the
cost of closing Inventory?

Question 3
“In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them
as expenses in the period in which they are incurred”. Provide examples of such costs as per AS-2
“Valuation of Inventories”.

Question 4
The company deals in three products, A, B and C, which are neither similar nor interchangeable. At
the time of closing of its account for the year 2014-15, the Historical Cost and Net Realizable Value
of the items of closing stock are determined as follows:
Items Historical Cost (₹ in lakhs) Net Realisable Value(₹ in lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of Closing Stock?

Question 5
X Co. Limited purchased goods at the cost of ₹40 lakhs in October, 2014. Till March, 2015, 75% of
the stocks were sold. The company wants to disclose closing stock at ₹10 lakhs. The expected sale
value is ₹11 lakhs and a commission at 10% on sale is payable to the agent. Advise, what is the
correct closing stock to be disclosed as at 31.3.2015.

Question 6
In a production process, normal waste is 5% of input. 5,000 MT of input were put in process
resulting in wastage of 300 MT. Cost per MT of input is ₹1,000. The entire quantity of waste is on
stock at the year end. State with reference to Accounting Standard, how will you value the
inventories in this case?

Question 7
On 31stMarch 2013 a business firm finds that cost of a partly finished unit on that date is ₹530. The
unit can be finished in 2013-14 by an additional expenditure of ₹310. The finished unit can be sold
for ₹750 subject to payment of 4% brokerage on selling price. The firm seeks your advice regarding

CA AVINASH SANCHETI 51
the amount at which the unfinished unit should be valued as at 31 st March, 2013 for preparation of
final accounts.

Question 8
Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year 2013-14
the Company used 12,000 MT of raw material costing ₹150 per MT. At the end of the year 630 MT
of wastage was in stock. The accountant wants to know how this wastage is to be treated in the
books. Explain in the context of AS 2 the treatment of normal loss and abnormal loss and also find
out the amount of abnormal loss if any.

Question 9
Sony Pharma ordered 12,000 kg. of certain material at ₹80 per unit. The purchase price includes
excise duty ₹4 per kg in respect of which full CENVAT credit is admissible. Freight incurred
amounted to ₹77,400. Normal transit loss is 3%. The company actually received 11,600 kg. and
consumed 10,100 kg. of material. Compute cost of inventory under AS 2 and abnormal loss.

Question 10
Raw materials inventory of a company includes certain material purchased at ₹100 per kg. The price
of the material is on decline and replacement cost of the inventory at the year end is ₹75 per kg. It
is possible to convert the material into finished product at conversion cost of ₹125. If selling price is
(i) ₹175 and (ii) ₹225, find out the value of inventory in each case.

Question 11
On 31stMarch 2013 a business firm finds that cost of a partly finished unit on that date is ₹530. The
unit can be finished in 2013-14 by an additional expenditure of ₹310. The finished unit can be sold
for ₹750 subject to payment of 4% brokerage on selling price.
The firm seeks your advice regarding:-
a) the amount at which the unfinished unit should be valued as at 31 st March, 2013 for
preparation of final accounts; and
b) the desirability or otherwise of producing the finished unit.

Question 12
A private limited company manufacturing fancy terry towels had valued its closing stock at the
realizable value, inclusive of profit and the export cash incentives. Firm contracts had been received
and goods are packed for export, but the ownership in these goods had not been transferred to the
foreign buyers.
You are required to advise the company on the valuation of inventories with the provisions of AS-2.

CA AVINASH SANCHETI 52