Tag: Segment Reporting

Generally when branches are small their accounts are maintained by the head office. If the branch is big and, specially, if it carries on manufacturing operations also, it usually maintains its own books of account, extracts own trial balance and prepares its own trading and profit and loss account and balance sheet.

The head office must, however, present one consolidated balance sheet for the benefit of the shareholders and the outside world. The head office will maintain, in its books, “Branch Account” to which goods or cash sent will be debited: When cash is received from the branch, the Branch Account will be credited.

The account is maintained more or less like other personal accounts, so that any expenses incurred on behalf of the branch will also be debited to the Branch Account. The balance of this account shows how much money the branch owes to the head office or, in other words, how much money the head office has invested at the branch.

Similarly, in the branch books, there will be Head Office Account. Goods received from head office, expenses incurred by the head office on behalf of the branch, cash received from head office, etc., will be credited. Cash sent to the head office will be debited. The balance in the account shows how much money is owing to the head office. There are a few special points to note.

Accounts of fixed assets. Usually, accounts relating to fixed assets used by the branch are kept in the head office books even if the asset is originally paid for by the branch. If it is so, the entry on purchase of a fixed asset by a branch will be to debit Head Office and credit Cash.

The head office will pass the following entry on receipt of advice from branch:

Branch Machinery (or Furniture or Building A/c) …. Dr.

To Branch Account

If payment for the asset is made by the head office, no entry will be passed by the branch. The head office will debit the particular branch asset (Branch Machinery, Branch Furniture, or Branch Building, etc.) and credit Cash.

Depreciation of Fixed Assets:

There is no specialty if the accounts of branch fixed assets are maintained in the branch books. But if the accounts of such assets are maintained in head office books, the entry in respect of depreciation will be:

Branch Account ….. Dr.

To Branch Fixed Assets

The branch will be debited because the branch uses the asset.

In the branch books, the entry will be:

Depreciation Account …. Dr.

To Hard Office Account

Head Office Expenses:

The head office always does some work on behalf of the branch and it is, therefore, usual to charge the branch at the end of the year with a reasonable amount for service rendered by the head office. The entry is:

Branch Account …… Dr.

To Profit and Loss Account

It may credit the Salaries Account, since it is mostly service rendered by the staff of the head office which has to be accounted for. The student should note not to credit cash since no payment is made specifically on this account. When salaries were paid to the head office staff, cash was credited; now only a proportionate charge is being made to the branch. The entry to be passed in the books of the branch is:

Head Office Expenses Account ….. Dr.

To Head Office Account

Head Office Expenses Account is an expense and will be transferred to its Profit and Loss Account by the branch at the end of the accounting year.

Reconciliation of Transit Items:

Normally, the balance shown in Branch Account (in head office books) and in the Head Office Account (in branch books) should be the same. One will be debit and the other will be credit. But on a particular date, there may be a difference in the balances shown by the two accounts. Suppose, branch remits cash on 30th March.

The branch will immediate debit head office and credit cash. But the head office will not pass the entry for receipt of cash till cash is actually received and that may be a few days later. For a few days, therefore, the two accounts will show different balances. On the date of closing of the accounts, the items in transit have to be brought into books. Adjustment entries have to be passed by the one which originally sent the cash or goods.

If cash is sent by the branch and is still in transit on the day of closing, branch will pass the following entry to make the necessary adjustment:

Cash in Transit Account ….. Dr.

To Head Office Account

Cash in Transit is an asset and will be shown in the balance sheet. If goods have been sent by the head office and are still in transit, the head office will pass the following entry on the date of closing:

Goods in Transit Account ….. Dr.

To Branch Account

The rule as to who will pass the entries in respect of cash or goods in transit is not hard. The head office may pass both the entries. For example, if cash sent by branch is still in transit and the entry for adjustment is to be passed in head office books, the entry will be:

Cash in Transit Account ….. Dr.

To Branch Account

The student must be careful to find whether something is in transit. If the balances shown by the branch account and the head office account are the same, nothing is in transit. If there is a difference, it should be assumed that cash (or goods) is in transit and the necessary entry should be passed.

Inter-Branch Transactions:

Where transactions take place between branches themselves, it will facilitate matters if a branch considers all transactions with other branches as if these are with head office. Suppose, Kanpur Branch sends goods to Agra Branch, the various entries to be passed will be as follows:

In Kanpur books:

Head Office Account ….. Dr.

To Goods Supplied to Head Office

In Agra books:

Goods Received from Head Office Account ….. Dr.

To Head Office Account

If each branch has to maintain accounts of all other branches, the ledger may become unwieldy. The head office will, of course, keep accounts of all the branches and will also record inter branch transactions. If, therefore, goods are supplied by Kanpur Branch to Agra Branch, the head office will pass the following entry:

Agra Branch Account ….. Dr.

To Kanpur Branch Account

Or

Agra Branch Account …… Dr.

Goods Received from Kanpur Branch Account ….. Dr.

To Goods Sent to Agra Branch Account

To Kanpur Branch Account

Incorporation of Branch Trial Balance in Head Office Books:

Since to the outside world, there is no difference between the head office and its branches, there must be a consolidated balance sheet if not a consolidated profit and loss account also. The process by which the consolidated balance sheet will be prepared is known as incorporation of branch trial balance. What it involves is that in the head office books, the Trading and Profit and Loss Account of the branch will have to be prepared and after that the combined balance sheet of the branch and head office. There are two ways of doing this.

First method:

In this method, the head office prepares Branch Trading Account Branch Profit and Loss Account.

The entries to be passed are as follows:

1. Debit Branch Trading Account and credit Branch Account with the total of the items (in Branch Trial Balance) usually debited to a Trading Account, such as Opening Stock, Purchases, Wages, Manufacturing Expenses, etc.
2. Debit Branch Account and credit Branch Trading Account with the total of items to be credited to the Trading Account Sales and Closing Stock.
3. Debit Branch Trading Account and credit Branch Profit and Loss Account with gross profit revealed by the Trading Account. (The entry will be reversed if there is a gross loss.)
4. Debit Branch Profit and Loss Account and credit Branch Account with the total of the various expenses and losses, e.g., Salaries, Rent, Depreciation, Discount Allowed, etc.
5. Debit Branch Account and credit Branch Profit and Loss Account with the total of gains or incomes such as discount earned.
6. Debit Branch Profit and Loss Account and credit (General) Profit and Loss Account with the net profit revealed by the Branch Profit and Loss Account. (The entry will be reversed if there is a loss).

The above six steps will enable the consolidated Branch Trading Account and Branch Profit and Loss Account to be prepared. If it is desired to close the books of the branch completely and to record branch assets and liabilities in the head office books for the purpose of preparing a common balance sheet, the following two further entries should be passed:

7. Debit branch assets individually (such as Branch Debtors, Closing Branch Stock, Cash in Hand at Branch, Cash in Transit, etc.) and credit Branch Account with the total of the assets.
8. Debit Branch Account and credit branch liabilities, such as Branch Creditors, Branch Expenses Outstanding, etc.

The effect of the eight entries is to balance off the Branch Account. It is not necessary to pass entries Nos. 7 and 8. In that case, the Branch Account will show a balance equal to net assets at the branch i.e., total of branch assets less branch liabilities.

Second method:

Under this method, the Branch Trading and Profit and Loss Account is prepared only as a memorandum account and entry is passed only for net profit or net loss at the branch.

Entries in Branch Books:

The branch books must also the closed. There are two ways of doing this. The first is to transfer all accounts to the head office account-separate entries being passed for revenue items and for assets and liabilities. The second method is to prepare the Trading and Profit and Loss Account and then to transfer the net profit or net loss to the head office account. Head office account will be closed, if assets and liabilities are also transferred if the assets and liabilities are not transferred, the head office account will show a balance equal to the net assets and thus a balance sheet can be prepared.

Under this method, it will be necessary to prepare the Branch Trading and Profit and Loss Account. The first three journal entries given in the first method will also be passed in this case, since they have nothing to do, really, with the closing of books.

If it is desired to close the books completely, assets and liabilities will be transferred to the Head Office Account the entries being exactly the same as the last two given in the first method. The Head Office Account will then balance. In some cases, the branch is not allowed to have full information about the value of goods sent to branch. In such as case, the branch is not informed about it and hence the branch cannot pass any entry in respect of it.

Only the Head Office will pass the appropriate entry in its own books. If such is the policy, the Head Office may not advise the branch about value of anything done by Head Office on behalf of the branch. Branch books will furnish a trial balance, but the information contained therein will be entirely inadequate to prepare the final accounts. In such a case, the branch will close the accounts of revenue items, at least, by merely transferring them to the Head Office Account.

Opening Entries:

Whether an opening entry is required in the books of the head office in the beginning of the year in respect of branch assets and liabilities depends upon what entries were passed at the close of the previous year. If accounts of branch assets and branch liabilities were not transferred to Branch Account, no opening entry will be required. Only the balance in the Branch Account will be carried forward. If the Branch Account was closed by transfer of the branch assets and liabilities, an entry will be required in the beginning of the year to re-transfer the assets and liabilities to the Branch.

Dependent Branches are branches that operate under the direct control of the head office. They have limited autonomy and rely on the head office for critical functions such as inventory procurement, pricing decisions, and financial management. The head office maintains detailed accounts of all transactions related to the branch, including sales, expenses, and stock. Dependent branches typically do not prepare independent financial statements; instead, their data is consolidated with the head office’s accounts. This system ensures centralized control, better monitoring, and streamlined operations, making it suitable for smaller or geographically close branches with limited decision-making authority.

Types of Dependent Branches

• Service Branch:

All the branches which are booking or executing orders on behalf of the head office are called service branches. These are the branches that are busy in executing all the orders for the sake of head office.

• Retail Branch:

Retail branches are also dependent branches, but they are concerned with the head office for selling goods, produced by the head office itself or purchased from outside in a bulky position and are sent to the retail selling branches for selling them out as like.

Features of Dependent Branch:

1. Centralized Control

• Dependent branches function under the strict supervision and control of the head office.
• The head office takes key decisions related to procurement, pricing, marketing, and financial policies.
• The branch manager primarily focuses on operational tasks as per the directives of the head office.

2. No Independent Financial Records

• Dependent branches do not maintain full-fledged financial records.
• Their transactions, such as sales, purchases, and expenses, are recorded by the head office.
• The branch usually keeps a memorandum record for internal purposes but sends all relevant details to the head office.

3. Limited Autonomy

• These branches have minimal decision-making authority.
• Functions like inventory management, pricing strategies, and promotional activities are handled by the head office.
• The branch’s role is limited to implementing policies and directives.

4. Stock Supplied by Head Office

• The head office supplies goods to the branch at either cost price or an invoice price.
• The branch does not procure goods directly from suppliers.
• The head office keeps detailed records of stock movements to and from the branch.

5. Sales and Collection

• Sales, whether on credit or cash, are conducted by the branch but under the pricing policies set by the head office.
• For credit sales, the head office manages customer accounts and debt collections.
• Cash collections are periodically remitted to the head office.

6. Profit and Loss Determined by Head Office

• The head office determines the profitability of the dependent branch.
• A branch’s performance is assessed by comparing revenues and expenses recorded in the head office’s accounts.
• The branch itself does not prepare independent profit and loss statements.

7. Simplified Reporting Structure

• The branch periodically sends sales reports, expense statements, and stock details to the head office.
• These reports ensure transparency and help the head office in consolidating branch operations.

When goods are invoiced at cost price, the head office sends goods to its branches at their original cost, without any markup or profit margin. This ensures that the branch’s accounts reflect the actual cost of goods rather than an inflated price. The system simplifies inventory valuation and profit calculation, as the branch directly records transactions based on the cost price. It is commonly used in dependent branch accounting, where the head office maintains control over pricing and profit determination. This method offers transparency and accuracy in financial reporting but may require additional adjustments for sales margins.

The consignor wants to know two things which are:

(1) To ascertain profit or loss when goods on consignment sold by the consignee.

(2) To know the settlement of account by the consignee i. e. to know the amount due by or due to consignee.

The consignment account is opened by the consignor to know profit or loss on each consign­ment. Each consignment is distinguished from the other by naming it in respect to place, examples, Consignment to Madras, Consignment to Bombay etc.

If there are a number of consignments in one place, then the name of the consignee is added to the consignment account, for example: Consign­ment to Ramu Account, Consignment to Krishna Account etc. For that, he opens a Consignment Account for each consignment.

It is revenue (Nominal) Account. It is a special Trading and Profit and Loss Account. Consignee Account is prepared to know the amount due by or due to the Con­signee. It is a personal account.

Journal Entries:

Journal Entries in the Books of Consignor

S. No.	Transaction	Journal Entry	Explanation
1	When Goods are Sent on Consignment	Consignment Account Dr.	To Goods Sent on Consignment A/c
2	When Expenses are Incurred by the Consignor	Consignment Account Dr.	To Bank/Cash Account
3	When Advance is Received from Consignee	Cash/Bank/Bill Receivable Account Dr.	To Consignee Account
4	When the Bill is Discounted by the Consignor with Banker	Bank Account Dr.	Discount Account Dr.
5	When Gross Sales Proceeds are Reported by Consignee	Consignee Account Dr.	To Consignment Account
6	For Expenses Incurred by Consignee	Consignment Account Dr.	To Consignee Account
7	For Commission Payable to Consignee	Consignment Account Dr.	To Consignee Account
8	For Unsold Stock Remaining with Consignee	Consignment Stock Account Dr.	To Consignee Account
9a	For Transferring Profit to Profit and Loss A/c	Consignment Account Dr.	To Profit and Loss Account
9b	For Transferring Loss to Profit and Loss A/c	Profit and Loss Account Dr.	To Consignment Account
10	For Settlement of Account by Consignee	Bank/Cash/Bill Receivable Account Dr.	To Consignee Account
11	When Goods Sent on Consignment A/c is Closed	Goods Sent on Consignment Account Dr.	To Trading/Purchase Account

The Consignor, instead of sending the goods on consignment at cost price, may send it at a price higher than the cost price. This price is known as Invoice Price or Selling Price. The difference between the cost price and the invoice price of goods is known as loading or the higher price over the cost. This is done with a view to keep the profits on consignment secret.

As such, consignee could not know the actual profit made on consignment. Hence the consignor sends the Proforma invoice at a higher price than the cost price. When the consignor records the transaction in his book at invoice price, some additional entries have to be passed in order to eliminate the excess price and to arrive at the correct profit or loss on consignment.

Items on Which Excess Price is to be Calculated:

Excess Price or Loading is to be calculated on the following items:

1. Consignment stock at the beginning
2. Goods sent on consignment
3. Goods returned by the consignee
4. Consignment stock at the end of the period

(a) To Remove the Excess Price in the Opening Stock:

Consignment Stock Reserve A/c Dr.

  To Consignment Account

(Being the excess value of opening stock is brought down to cost price)

(b) To Remove the Excess Price in the Goods Sent on Consignment:

Goods sent on Consignment Account Dr.

  To Consignment Account

(Being the difference between the invoice price and cost price is adjusted)

(c) To Remove the Excess Price in Goods Return:

Consignment Account Dr.

  To Goods sent on Consignment A/c

(Being to bring down the value of goods to cost price)

(d) To Remove the Excess Price in Closing Stock:

Consignment Account Dr.

To Consignment Stock Reserve A/c

(Being the excess value of stock is adjusted)

But these adjustments are not needed in consignee’s book. Invoice price does not affect the consignee. When the stock is shown in the Balance Sheet, in Consignor’s Book, the Consignment Stock Reserve is deducted.

Normal Loss refers to the unavoidable and inherent loss that occurs during the regular course of business operations, especially in manufacturing, transportation, and storage. It is considered an expected and uncontrollable part of production, such as evaporation, shrinkage, or spoilage. Normal loss is typically accounted for in cost calculations, and its value is distributed across the remaining usable units to determine the cost per unit. Since it is anticipated, normal loss does not impact profit directly but increases the cost of goods manufactured or sold.

Accounting Treatment:

The cost of normal loss is considered as part of the cost of production in which it occurs. If normal loss units have any realisable scrap value, the process account is f credited by that amount. If there is no abnormal gain, then there is no necessity to maintain a separate account for normal loss.

Journal Entry:

(i) Normal Loss A/c …Dr.

To Process A/c

(ii) Cost Ledger Control A/c …Dr.

(Scrap value) To Normal Loss

Abnormal Loss:

Abnormal loss means that loss which is caused by unexpected or abnormal conditions such as accident, machine breakdown, substandard material etc. From accounting point of view we can say that abnormal loss is that loss which occurred over and above normal loss. These losses are segregated from process costs and investigated to prevent their occurrence in future.

Process account is to be credited by abnormal loss account with cost of material, labour and overhead equivalent to good units and the loss due to abnormal is transferred to Costing Profit and Loss Account.

Journal Entries:

(i) Abnormal Loss A/c …Dr.

To Process A/c

(ii) Cost Ledger Control A/c …Dr. (Scrap value)

Costing Profit & Loss A/c …Dr.

To Abnormal Loss

Abnormal Gain:

If the actual loss of a Process is less than that of expected loss then the difference between the two will be treated as abnormal gain. In another way we can define it as the difference between actual production and expected production.

Accounting Treatment:

The value of abnormal gain is transferred to the debit side of the relevant process and ultimately closed by crediting it to the Costing Profit and Loss Account.

Journal Entries:

(i) Process A/c ..Dr.

To Abnormal Gain

(ii) Abnormal Gain A/c ..Dr.

To Normal Loss

To Costing Profit & Loss A/c

Stock reserve is an adjustment made to account for unrealized profits that arise when goods are transferred between departments or branches of a business at a price above cost. The objective is to eliminate such unrealized profits from the closing stock valuation to ensure that only actual realized profits are reported in the financial statements.

In many organizations, especially those with multiple branches or departments, goods are often transferred internally. When goods are transferred at a profit margin (i.e., at a selling price higher than the cost), this creates an artificial profit in the transferring branch. However, since these goods are not yet sold to external customers, the profit is unrealized and should not be considered in the consolidated financial statements. Hence, a stock reserve is created to adjust the closing stock valuation.

Need for Stock Reserve:

• Avoidance of Overstated Profits

Without a stock reserve, unrealized profits would inflate the profit figures of the business, leading to misleading financial results.

• True and Fair Financial Reporting

The stock reserve ensures that the financial statements reflect only actual realized profits, adhering to the principle of conservatism in accounting.

• Internal Transfers

In organizations with decentralized operations, branches or departments may maintain their accounts separately. When goods are transferred at a price above cost, creating a stock reserve helps adjust for the unrealized profit in the branch stock.

Calculation of Stock Reserve:

The stock reserve is calculated as a percentage of the value of closing stock. The percentage used is based on the profit margin included in the transfer price of goods.

Stock Reserve = Closing Stock × Unrealized Profit Percentage

Where the unrealized profit percentage is determined as:

Unrealized Profit Percentage = [(Transfer Price − Cost Price) / Transfer Price] × 100

Accounting Principles Involved:

• Conservatism:

Stock reserve follows the conservatism principle, which states that unrealized profits should not be recorded in the financial statements.

• Matching Principle:

By eliminating unrealized profits from the closing stock, the stock reserve ensures that only the realized portion of revenue is matched with the related expenses.

Lessor is the party that owns the asset and grants the lessee the right to use it for a specific period in exchange for periodic payments. The accounting treatment in the books of the lessor is essential to correctly reflect the transaction’s financial position, and it primarily follows the standards outlined by Ind AS 17 (now replaced by Ind AS 116) and IFRS 16 in certain cases. This treatment involves various entries for lease income, depreciation, and asset management.

1. Recognition of Lease Income

For a lessor, the primary income generated is the lease rent paid by the lessee. The lease income recognition follows the systematic approach over the lease term. There are two main categories of lease income, depending on the type of lease: operating lease and finance lease.

A. Operating Lease

An operating lease is one where the risks and rewards of ownership remain with the lessor. In this type of lease, the lessor continues to recognize the asset on its balance sheet and records the income over the lease term.

• Journal Entries for Operating Lease Income:
  • Receipt of lease rent:
    • Debit: Bank/Cash Account (for the amount received)
    • Credit: Lease Income Account (for the amount of lease rent)
  • Recognizing lease income: The lessor records income on a straight-line basis unless another systematic and rational method is more representative of the time pattern of the lessee’s benefit.
    • Debit: Lease Income Account
    • Credit: Unearned Rent Account (in case of advance receipts or deferred income)

This means that the lessor earns consistent revenue during the lease term, irrespective of the actual payment schedule (unless it is variable in nature).

B. Finance Lease

In a finance lease, the risks and rewards of ownership are transferred to the lessee. The lessor, therefore, recognizes the lease as a receivable equal to the net investment in the lease (i.e., the present value of lease payments plus the unguaranteed residual value). It is treated as a financing arrangement rather than a rental agreement.

• Journal Entries for Finance Lease Income:
  • Recognition of Lease Receivable (at the start of the lease):
    • Debit: Lease Receivable Account (net investment in the lease)
    • Credit: Asset Account (for the cost of the asset or its carrying amount)
  • Recognizing Interest Income (Interest on Lease Receivable):
    • Debit: Lease Receivable Account (reducing principal)
    • Credit: Interest Income Account (recognizing interest earned)
  • Lease Payments Received:
    • Debit: Bank/Cash Account (for the amount received)
    • Credit: Lease Receivable Account (reducing the principal balance)

In a finance lease, the lessor earns both interest income and lease principal payments over the lease term. This results in a front-loaded interest income pattern.

2. Depreciation of Asset

In the case of an operating lease, the lessor retains ownership of the leased asset and is responsible for depreciating the asset over its useful life. The depreciation method and the estimated useful life of the asset should comply with the lessor’s accounting policies, following standard depreciation methods like straight-line or declining balance method.

• Journal Entry for Depreciation:
  • Debit: Depreciation Expense (in the Income Statement)
  • Credit: Accumulated Depreciation (on the Balance Sheet)

The depreciation charge is recorded by the lessor for each period until the asset’s useful life is exhausted or it is sold or disposed of.

In a finance lease, the lessor may not record depreciation on the asset as the lease effectively transfers the ownership risks to the lessee. However, some lessors might continue to depreciate the asset if they do not transfer ownership entirely or have a residual interest.

3. Initial Direct Costs

In the case of a lease agreement, the lessor may incur certain initial direct costs that are directly attributable to negotiating and arranging the lease. These costs could include legal fees, commissions, and any other expenses directly related to the lease agreement.

• Journal Entry for Initial Direct Costs:
  • Debit: Lease Receivable (in case of finance lease)
  • Debit: Expense Account (in case of operating lease)
  • Credit: Bank/Cash Account

These initial direct costs are recognized over the lease term. In an operating lease, they are amortized on a straight-line basis unless a different systematic basis is appropriate.

4. Recognition of Residual Value

In both operating and finance leases, the lessor may expect to receive a residual value of the asset at the end of the lease term. If the lease has a guaranteed residual value, it is included in the lease receivable. For an operating lease, the lessor will revalue the asset based on its estimated residual value and take appropriate measures for depreciation.

5. Sale and Leaseback Transactions

In cases where a lessor sells an asset and leases it back, the transaction is treated as a sale and leaseback. The accounting treatment in this case depends on whether the transaction is classified as a finance lease or operating lease. If it is an operating lease, the sale is recognized and the leaseback terms are accounted for as a lease.

Stock Valuation refers to the process of determining the value of inventory held by a business at the end of an accounting period. Accurate stock valuation is crucial for financial reporting, profit calculation, and proper cost management. Inventory is classified as a current asset on the balance sheet, and its valuation directly affects both the cost of goods sold (COGS) and the net income of the business.

Objectives of Stock Valuation:

• Accurate Profit Determination

Proper valuation of inventory ensures accurate determination of COGS and, consequently, the correct profit or loss for the period.

• True Financial Position

Inventory is a significant asset, and its correct valuation is essential for presenting a true and fair financial position of the company.

• Efficient Cost Control

Stock valuation helps in monitoring and controlling production and operational costs by providing insights into material consumption and wastage.

• Compliance with Accounting Standards

Accurate stock valuation ensures adherence to accounting principles and standards, such as the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Methods of Stock Valuation:

There are several methods for valuing stock, depending on the nature of the business and accounting policies adopted. The commonly used methods are:

1. First-In, First-Out (FIFO)

The FIFO method assumes that the oldest inventory items are sold first. Therefore, the ending inventory consists of the most recent purchases.

Advantages:

• Provides a realistic view of ending inventory value, as it is based on the most recent prices.
• Useful in periods of inflation, as the cost of goods sold is lower, resulting in higher profits.

Disadvantages:

• Higher profits may result in higher tax liability during inflationary periods.

Example:

Date	Units Purchased	Cost per Unit (₹)	Total Cost (₹)
1 Jan	100	10	1,000
5 Jan	200	12	2,400
Total Units Sold = 150

COGS for 150 units:

• 100 units @ ₹10 = ₹1,000
• 50 units @ ₹12 = ₹600

Total COGS = ₹1,600

2. Last-In, First-Out (LIFO)

LIFO method assumes that the most recent inventory items are sold first, and the ending inventory consists of the oldest purchases.

Advantages:

• In periods of inflation, LIFO results in higher COGS and lower profits, which can reduce tax liability.

Disadvantages:

• The ending inventory may be undervalued since it consists of older costs, which may not reflect current market prices.
• LIFO is not permitted under IFRS.

Example:

Using the same data as in the FIFO example:
COGS for 150 units:

• 150 units @ ₹12 = ₹1,800

  Total COGS = ₹1,800

3. Weighted Average Cost (WAC)

WAC method calculates the cost of ending inventory and COGS based on the average cost of all units available for sale during the period.

Formula:

Weighted Average Cost per Unit = Total Cost of Inventory / Total Units​

Example:

Using the same data:

Total units = 100 + 200 = 300

Total cost = ₹1,000 + ₹2,400 = ₹3,400

Weighted average cost per unit = ₹3,400 ÷ 300 = ₹11.33

COGS for 150 units = 150 × ₹11.33 = ₹1,699.50

Comparison of Methods

Criteria	FIFO	LIFO	WAC
Cost Flow Assumption	Oldest items sold first	Newest items sold first	Average cost
Ending Inventory Value	Higher during inflation	Lower during inflation	Moderate
Profit Impact	Higher profit	Lower profit	Average profit
Permitted by IFRS	Yes	No	Yes

Importance of Consistency

Once a method of stock valuation is adopted, it should be consistently applied across accounting periods. Changing methods frequently can distort financial results and reduce comparability. However, any change in the valuation method must be disclosed, along with its financial impact, as per accounting standards.