A soap manufacturing company has valued its stock of finished goods at cost or realisable value whichever is lower and other items of inventory, like raw materials, work-in-progress and spare parts, at cost. It has disclosed its accounting policy regarding valuation of inventory in the financial statements appropriately.
Whether the company’s accounting policy regarding valuation of inventory is correct?
As per Para 5 of AS 2, “Valuation of Inventories”, “Inventories should be valued at the lower of cost and net realisable value.”
As per AS 2, net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and the estimated costs necessary to make the sale.
If a company value its finished goods at lower of cost or realisable value, then it results in non-deduction of costs of completion of goods and estimated costs necessary to make the sale of goods from the selling price.
Therefore, in the given case, the company’s accounting policy regarding valuation of inventory is not correct.