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CA Foundation · Accounting

Inventories (AS 2) for CA Foundation Accounting

Inventories are goods held for sale, in production, or as materials to be used in production or services. Under AS 2, you value them at the lower of cost and net realisable value. To solve questions, find cost, apply a cost formula, find NRV, compare item by item, and take the lower figure.

What this chapter covers

This chapter covers AS 2 Inventories, the Indian accounting standard on how to value stock. It tells you what goes into the cost of stock, which cost formula to use, and when to write stock down below cost. It also lists what a company must disclose.

Most questions are numerical. You are given purchases, expenses, selling prices and sometimes a stock count date, and you must compute the closing stock value. A few questions are theory based, such as what is included in cost or which items are excluded from it.

The chapter links to other parts of the paper. Closing stock feeds directly into the trading account, the profit calculation and the balance sheet. It also connects to final accounts, to accounting concepts like prudence and consistency, and to the other accounting standards you study. If you are comfortable here, those chapters become easier.

Inventories is a compact chapter with clear rules, so it rewards steady practice. Questions follow a few repeating patterns: cost computation, lower of cost or NRV, FIFO versus weighted average, and adjusting stock to a balance sheet date. Because answers are subjective, you earn step marks for showing cost build-up, comparisons and the final figure clearly. Stock value also affects profit in many other questions, so an error here can carry through to later answers. Learning this chapter well gives you reliable marks for modest effort.

Inventories: topics in the order to study them

  1. 1Meaning and Scope of AS 2 InventoriesStart here to learn what counts as inventory and what AS 2 does not cover, so you do not apply it to the wrong items.
  2. 2Cost of Inventories: Purchase and Conversion CostsEvery valuation begins with cost, so you must know what to include and exclude before using any formula.
  3. 3Net Realisable Value and Lower of Cost or NRVThis is the core rule of the standard and the most tested comparison, and it builds directly on cost.
  4. 4Cost Formulas: FIFO, Weighted Average and Specific IdentificationOnce you know what cost is, you learn how to assign it to units issued and units left in stock.
  5. 5Techniques of Cost Measurement: Standard Cost and Retail MethodThese are shortcuts for estimating cost, so they make sense only after the main cost formulas are clear.
  6. 6Inventory Valuation Adjustments at Balance Sheet DateThis applies everything you have learned to stock counted on a date different from the balance sheet date.
  7. 7Disclosure Requirements under AS 2Finish with disclosures, which are short, theory based and easy to revise once the rest is clear.

How to prepare Inventories

Treat this as a numbers chapter with a small theory core. Build the method first, then speed.

  1. Read the scope and definitions once and write the meaning of inventory, cost and NRV in your own words.
  2. Make a two-column list of items included in cost and items excluded from cost, and learn it until you can write it without looking.
  3. Practise lower of cost or NRV item by item. Write cost, NRV, the lower figure, and only then the total.
  4. Solve FIFO and weighted average questions in a table with receipts, issues and balance, so each step is visible to the examiner.
  5. Practise balance sheet date adjustments with a fixed format: stock on counting date, add or subtract movements, reach the balance sheet date value.
  6. Learn the disclosure points as a short list and write them in a few lines in answers.
  7. Finish with a timed mixed set of questions and check that every answer shows working and a clear final figure.

Common mistakes in Inventories

  • Including excluded costs such as selling expenses, abnormal wastage, or administrative overheads that do not contribute to bringing inventories to their present location and condition in cost.

    Fix: Go through each cost given and tick it as included or excluded before adding. Write a one-word reason for each exclusion.

  • Comparing total cost with total NRV instead of item by item.

    Fix: Make a table with cost, NRV and the lower figure for each item, then total the lower figures.

  • Forgetting to deduct costs of completion and selling expenses when finding NRV.

    Fix: Always write NRV = selling price − costs to complete − costs to sell as the first line of the working.

  • Errors in the FIFO or weighted average table, such as wrong balance units or mixing issue prices.

    Fix: Use a table with receipts, issues and balance columns, and check units and value at each row.

  • Ignoring the date difference between the stock count and the balance sheet date.

    Fix: Underline both dates first. Start from the counted stock and adjust for purchases, sales and returns in between, converting sales to cost where needed.

  • Skipping the final conclusion or leaving the answer without a clear closing stock figure.

    Fix: End with a line stating the value at which inventory will be shown in the balance sheet, so the examiner can award the final mark.

Last-day revision: Inventories

  • Inventories are goods held for sale, in production, or as materials to be consumed in production or services.
  • Value inventories at the lower of cost and net realisable value.
  • Cost includes purchase cost, conversion cost and other costs to bring stock to its present location and condition.
  • Trade discounts and rebates are deducted from purchase cost.
  • Abnormal wastage, storage costs (unless necessary in production), administrative overheads that do not contribute to bringing inventories to their present location and condition, and selling costs are excluded from cost.
  • NRV is estimated selling price less estimated costs of completion and costs necessary to make the sale.
  • Compare cost and NRV item by item or by group of similar items, not on the grand total, unless items are closely related.
  • FIFO assumes the oldest stock is sold first, so closing stock is valued at the latest prices.
  • Weighted average cost is total cost of available units divided by total units available.
  • Specific identification is used for items that are segregated for specific projects, and for goods or services that are not ordinarily interchangeable.
  • Standard cost and retail methods are allowed only if the result approximates actual cost.
  • For a count on another date, adjust for sales and purchases between that date and the balance sheet date, at the right basis.

Inventories practice questions

Inventories: frequently asked questions

Is AS 2 Inventories important for CA Foundation?

Yes. It is a regular topic in the Accounting paper and mixes theory with numerical questions. It also affects final accounts, so the skill carries into other chapters.

Which is easier to learn, FIFO or weighted average?

Both are simple if you use a table. FIFO tracks lots in order of purchase, while weighted average needs a fresh average each time stock is received (or one average for the period, as the question states). Follow the method the question asks for.

How do I decide between cost and NRV?

Work out both for each item and take the lower. If NRV is lower, write the stock down to NRV. If cost is lower, keep it at cost, because gains are not recognised before sale.

Do I need to learn the disclosure requirements?

Yes. They are short and often asked as a theory part. Learn them as a list, such as the accounting policy and cost formula used, and the carrying amount in classifications appropriate to the enterprise.