Stock valuation is how a business puts a rupee figure on its closing stock. That figure goes into the balance sheet and directly changes the profit for the year: overvalued stock means overstated profit.
The rule
Under the accounting standard on inventories (AS 2, or Ind AS 2 for companies that follow it), stock is valued at the lower of cost and net realisable value.
- Cost
- includes purchase price, freight in, unloading and non-refundable duties, and for a manufacturer, conversion costs. GST that can be claimed as credit is excluded.
- Net realisable value
- is the expected selling price less costs to complete and sell.
Cost methods
FIFO or weighted average cost are the usual methods. Specific identification is used for unique items, such as a machine built to order.
Example
| Item | Qty | Cost each | NRV each | Value |
|---|---|---|---|---|
| GVT 600x600, current series | 800 boxes | ₹560 | ₹720 | ₹4,48,000 |
| Old series | 300 boxes | ₹520 | ₹400 | ₹1,20,000 |
Why it is often wrong
Physical counts not matching the books, missing freight in the cost, and unsold lots carried at full cost. A count at least once a year, and for high-value items more often, keeps the figure honest.