 And today we shall continue our discussion on depreciation. In the last session we have discussed what do you mean by depreciation. I hope you all remember that depreciation refers to continuous reduction in the value of fixed asset. Usually it is caused by wear and tear or by obsolescence or simply by passage of time. We are also started our discussion on certain methods of depreciation. Today we have discussed straight line method and reducing balance method. In straight line method the amount which is to be depreciated say the cost of asset is 1 crore and it has a useful life of 4 lakhs, 4 years. So we have to write off 1 crore over a period of 4 years. It is written off in the equal installments. That is why it is called as a straight line method. So what we will do is 1 crore upon 4. So each year we will write off 25 lakhs. That is known as straight line method. There is another method known as reducing balance method where we will apply some percentage. For example, say it is 1 crore we may decide to write off 30 percent each year. So in year 1 we will write off 30 lakhs. In year 2 we will not write off 30 lakhs we will take 1 crore minus 30 lakhs that is 70 lakhs which is known as written down value. On that 70 lakhs we will charge 30 percent. So maybe we will charge 21 lakhs in the year 2. In year 3 it is 70 minus 21. So 49 into 30 percent and so on. So in reducing balance method the amount of depreciation goes on falling goes on reducing. That is why it is known as reducing balance method. Because the two methods reducing balance method is advantages because in the initial years more depreciation is charged and in the latter years less depreciation is charged. As you all know in later years the cost of maintenance or repairs is going to increase. So depreciation plus repair the total charge is more or less matched over the period of time. So you usually RBM method is preferred over SLM method or straight line method. Let us go to next methods now. So this is about depreciation then causes of depreciation, objectives, factors we were here we have already discussed SLM and RBM. Now let us see the third method which is known as machine hour method. Now here the depreciation is actually charged on the basis of use of asset. Because depreciation is basically meant to be a charge on use. So here we are trying to really charge it for the number of hours the asset is used. Of course here there is a precondition that there should be proper recording of number of hours each day and each month and so on. Now here the rate of depreciation is calculated by estimating the total number of hours that machine could be used throughout the life. So here is an example if the cost of machine let us say is 5 lakhs estimated hours are 40,000 the scrap value is 10,000. Now estimation has to be made as to the pattern of use. So this is the roughly the pattern. Now here we have the information that the total cost of the asset is 5 lakhs. You also know the scrap value. Can you calculate the depreciation per hour? Think of it. First of all you will have to calculate the depreciable amount throughout the life. So 5 lakh is a cost minus 10,000 which is scrap. So 4 lakh 90,000 becomes the amount to be depreciated over the life. And over the life we know that 40,000 is a number of hours. So 4 lakh 90,000 divided by 40,000 is a hourly rate. We can see the solution. So here you can see in the year 1 and 2 what is expected is only 5000 hours of usage. So 5000 upon 40,000 into 5 lakh minus 10,000 which is a depreciable amount. So depreciation comes to 61,250 per annum. Are you getting me? So essentially what we are doing is 5 lakh minus 10,000 that is 490 is a depreciable amount divided by 40,000 gives me the rate. I am multiplying it by 5,000 in years 1 and 2. Same way in year 3 and 4 I am going to multiply the rate by 7,000 because machine is going to be used more in this period. So early rate becomes 87,000 85,750. In year 6 and 8 again the amount of use is going to come down to just 3000 hours. So the depreciation amount has been recalculated and it is now 36,750. So you will realize that in machine hour method the charge of depreciation is not kept uniform but it is based on number of hours the machine is likely to be used or is actually used. So according to this chart you will realize that initial 2 years the use is 5000, maximum use is between 3 to 5 years where it is 7,000 and in the last years it tapers off. It reduces to just 3000 between 6 and 8 years. So we have calculated depreciation also according to the use that is why this is a better method than the earlier 2 methods but only disadvantage is you should have reliable estimates on number of hours the machine is likely to be used. There is one more method which is similar that is based on production units. So here we try to calculate the number of units for which the machine is used and the output which it produces. Now the depreciation is calculated like this. So you have the depreciable amount we will multiply by production during the period divided by the estimated total production. So again let us look at an example. Now the cost of machine is let us say 3000 the machine is likely to give a production of 4000 during its useful life and scrap value is 2000. Now looking at this data can you calculate estimated depreciation per unit? Can you calculate how much is a depreciable amount? We will realize the depreciable amount is 3000 minus 2000 that means 28000 is to be depreciated over a life and the total estimated production is around 4000. So 28 upon 4 so 7 rupees per unit becomes depreciation of the machine. Now we will look at the pattern of production. Now it is estimated that highest use that is 2000 units will be produced in year 1. The use will reduce it will become 1 5 in year 2 and only 500 in year 3. Thus the depreciation now also will be calculated proportionately. So it is 14000 in year 1. Now you already know that the rate is 7 rupees per unit 7 into 2000 also you can calculate it will come to 14000 or the weight is calculated here. You can take 2000 upon 4000 into 30 minus 28. In year 2 the use is 1500 so the depreciation charge becomes 10500. In year 3 how much will be depreciation? If you remember in year 3 the units produced is expected to be only 500. So depreciation will be 500 upon 4000 into 28000. So it is 3500 is it clear? So both the methods are fairly similar machine hour and production unit and both intend to charge the depreciation based on the actual use of the asset. Now let us go to one more concept in accounting that is known as provision. This is a very interesting concept because you might remember that we have discussed about current liability and this is very close to current liability. So suppose company has to pay 30000 per month to an employee in the month of March the salary has not yet been paid and it is expected to be paid in the month of April. So as on 31st March the salary of March is treated as a current liability in the balance sheet. Now sometimes what happens is the expected liability cannot be estimated with substantial accuracy. So we were discussing that the salary is 30000 so we could easily estimate we could easily know that the amount which is payable is going to be 30. Suppose what happens is the amount of depreciation the amount of expense is not known to us. Let us say instead of salary usually an employee is paid a bonus of 5000 per month bonus or an incentive but this is usually it may change as per performance. So we do not know exactly how much amount will be payable in the month of March. So when we prepare the balance sheet for 31st March we will have to make a rough estimate and based on a rough estimate we will try to estimate the liability such rough estimate is known as provision. Can you think of any other example of a provision? Just think over where the liability exists but we do not know the amount. Let us say we have to pay electricity bill at the end of the month. As on 31st March the bill is not yet received for the month of March. It is expected to be received only say by 15th of April but we have to pay the amount of bill for March in the month of April. So we need to make calculation of some liability towards electricity bill of the month of March and show it in the balance sheet of 31st March. Since we do not know the amount the bill is yet to be received what we will do is we will try to calculate the estimate the bill of March based on the earlier data. We may use last 12 months average or last 3 months average and so on will estimate and we will make the calculation for the amount of liability which is payable. So what you can see is provision is very similar to current liability however the amount is required to be estimated it is not very much well known. Now why we have to make provision? One important reason we have to make provision is because of the principle of conservatism. So all the probable liabilities we need to estimate and make a provision for show them as liability. Secondly it also goes with the matching concept because the expenditure is for this period we have to show it in this period only. Even if it is likely to be paid in next period it is necessary that it should be accounted for in the current period since we do not know the amount we try to go for the provision. Some more examples of provision when is product service warranty cost. So let us say we have sold a product we give the warranty for next 3 years. So if there is any fault which occurs in the next 3 years the manufacturer will have to repair it without any charges. Now naturally manufacturer does not know what is the likely repair cost in the first 3 years. So manufacturer based on the past data makes an estimate of likely cost of giving warranty and make the provision for it. That is why there is a provision required for product service warranty cost. Same way bad debts. Now whenever business sells the goods on credit there is likelihood that some of the customers fail to pay the amount. So when we sell the goods there is a chance that a few customers will not pay for which we have to make a provision that is known as provision for bad debts or provision for doubtful debts. Here again based on the past data company may make a provision for 1 percent, 2 percent, 30 percent depending on the bad debts which were incurred in the earlier years. One more example is given here that changes in the foreign exchange rates. Now if the company is entering into international transactions there is every possibility that forex rates may change leading to reduction in the value of our foreign exchange assets. Again company will have to make an estimate and make the provision. Of course it is much difficult to estimate forex rates but based on the reasonable assumption some estimation may have to be made. So this was about provisions. Now let us go to the second part which is now about valuation of inventory. So in module 3 alone we are going to look at the valuation of inventory now. We have discussed the depreciation. In this particular PPT we are going to discuss Goodwill and its amortization, valuation and accounting for inventory and about the window dressing. So initially we will start our discussion on Goodwill. Now Goodwill is a benefit and advantage of the good name. As you know suppose we have to purchase something we generally prefer a well known company or a well known brand. So if shopkeeper shows you a product which is totally new which you have never heard of company which you have never heard of you are likely to say that no no no I want the product which I normally use. This happens because of the Goodwill which is created by the company. In some manner when employees have to join some company usually they prefer a listed company they prefer a large size company they prefer a company which is known for having good policies or good behavior towards employees. Why it happens? Again because of the Goodwill of the company. When suppliers have to supply the goods again if they have already dealt with some person or some company they prefer to supply to the same person because they know that they will receive the payment in time they also know the party. They know that the party is reliable all these factors are built into what is known as Goodwill. So Goodwill is a benefit and advantage of good name reputation and connection. This is something which makes the difference between an existing entity and a newly new entrant in the field. Always an existing entity has an advantage over a new entrant because existing entity is likely to have developed Goodwill over the period of years. Now Goodwill is nothing but the attractive force which attracts customers, employees or suppliers as we have just now discussed. Now what is the effect? The effect of Goodwill is that over the period of time a well known company will be able to earn more profits than a new company. Why? Because they get access to raw material easily they have the capacity to sell more goods or they may have a capacity to charge premium on the products or services which they sell. They also may attract good employees. As a result of all these things an established player is likely to have more profit than a new player. So what profit which can normally be earned is known as normal profit whereas a reputed entity is likely to earn something known as super profit which is extra profit over the normal profit. So if a company is earning super profit generally it is assumed that the company has some Goodwill in the market. Now Goodwill of a business is something which is composite of many things. It is very difficult to know exactly because of what Goodwill is created or generated. I have tried to list a few factors. One of the factor is location or locations of business especially in case of retail trade. This is very important where the shop or the mall is located because that helps in attracting customers. It also depends on where the factories or where the workplaces are located. Then the way in which business is conducted this is very important. So if as a customer if you visit a shop if you get a feeling that the person the shop is reliable the people are courters the people are providing good service then you are likely to again go to the same shop. So the way the business is conducted actually creates the Goodwill for the entity. The third personality of the people conducting the business here again it is important if the person receives you well you feel very happy you feel like you can go ahead you can go again. So right from the employee with whom you are interacting up to CEO different persons you may be interacting in a particular entity or a company and that personality helps those personalities help in creating the Goodwill. Next is customer relationship and service quality. So if a company is known to have good relationship with customers it is known that the quality of service they provide is good then it helps in building Goodwill. Then again good relations with employees employee friendly policy especially from employee angle the good for Goodwill these things are very important. The number of years the business or the entity exists this is also very important. Can you remember some very well known companies in India or very well known brand names in India which are there for a pretty long time. I think most of you would remember Tata group it has been around for more than 100 years. So any new product which is launched by a Tata group company naturally has an advantage because it has been there for so many years in business. So just by being in the business is not enough they have developed a good name. But even when a company exists for a pretty long time there is an advantage over new years new players. Next factor is track record of a benevolent management. So if you know that the management is good they are not going to cheat they are not the ones who create malpractices then the Goodwill gets developed. As you all know Goodwill is an intangible asset. Can you think of three four well known brand names or three four well known corporations in India or abroad give a thought which are the companies who have developed Goodwill. Let us say in automobile segment I think most of you will remember the name Maruti. Maruti is not as old as Tata's it has emerged in 1980s but still it has a very good name in the Indian automobile company industry. Same way in consumer products there are number of companies say like HLL which have developed names. In the same manner in the industrial products also people know the companies in their fields which are known to be reputed. As you all know there are IT companies like TCS or Infosys or Vipro Satyam these all now Satyam has been converted into Mahendra Tech but these are all the companies which have developed Goodwill of their own. Now the Goodwill which most of you were talking or most of the time which we are talking is self generated Goodwill. Keep in mind it is not recognized in the financial statements. So company might have been working for a pretty long time it may be very good it might have created good name in the market and the advantage which it gets because of its may be reflected as a Goodwill. However, accounting standards or gap does not allow self generated Goodwill to be recognized in the financial statements. Now what could be the reason? It is for two three reasons. The most important reason is it is very difficult to reliably estimate. There is no objectivity. Many people will put many different values for their own Goodwill. Since the accounts are supposed to be objective and reliable documents you cannot have something which is vague something which is just judgmental in nature that is why self generated Goodwill is not permitted to be shown in the financial statements. Does it mean that no Goodwill is recorded that is not true. So Goodwill which comes from purchase of business from a third party is recognized as Goodwill in the business. It is known as purchase Goodwill. For example, to you think of any can you think of any merger related transactions in last few years any company has taken over some another company. A very famous merger or takeover was when Tata Motors took over Jaguar. You must be knowing that Jaguar was extremely well is was and is extremely well known name all over the world particularly in Europe. So, when Jaguar and Landlover were taken over by Tata's they had to pay huge premium. That money which they paid is shown in the books of Tata Motors as Goodwill. This is an example of purchase Goodwill. So, if some business is purchased and purchase consideration exceeds the value of net assets taken over then the loss suffered is treated as Goodwill. This is as per AS 14 in AS 38 and also as per IAS 38. Now, let us see some examples as to how the Goodwill is calculated and recognized. So, suppose A took over B and the purchase consideration paid by A is 150 crores and the assets of B which are taken over are as follows. So, they have taken over machinery, land and net current assets and they have also taken over liabilities. We know the book value, we know the market value and we know that the purchase consideration is 150 crores. Now, how much is a Goodwill of the entity? How much is a Goodwill which A has paid to B? Can anyone calculate? Imagine, how you can calculate the Goodwill? Goodwill is calculated as the price paid that is purchase consideration minus net assets which are taken over. So, 150 crores minus the assets which is acquired. Now, should the assets be taken at book value or at the market value? Book value is a value which is there in the balance sheet of the selling company which is B or we should look at the market or the current value. Just give a thought, since B is being sold out to A, it is logical to take market value rather than book value. So, if you make a fast calculation on market value, what is the value of net assets taken over by B, taken over of B by A? So, you can see it is 50 plus 70 plus 40 minus 20. So, how much it will come to? So, 140 is a net assets which are taken over and the purchase consideration paid is 150. So, Goodwill is 10 crores. So, as we were seeing Goodwill is something over and about the value of assets which A or the buying company has paid. So, the value of assets at the market prices is 140, but A has agreed to pay 150 which is over and about the market price. Why is A paying more? Because they realize that the business of B is actually more than that 140 more than the assets which you can see. There is something more which is hidden, something more which you cannot see, but it exists. It gives benefit to the business. That something more is a reputation of the company which is known as Goodwill. So, Goodwill is valued at 10 crores. Is it clear to all? Let us go ahead. Now about amortization. Now, in this case you have seen that A has purchased business of B and when it purchased it paid 10 crore more, which is shown in the balance sheet of balance sheet of A as Goodwill. Now, can you show this Goodwill forever in the business, in the balance sheet of the business? The answer is no. Just as you will write off all other assets through depreciation, you will also have to write off Goodwill. This process of writing of Goodwill is known as amortization. So, what accounting standard says is the depreciable value amount of intangible asset should be allocated on a systematic basis over its useful life. This is known as amortization. In simple words, you can say amortization is nothing but depreciation on intangible assets. So, all intangible assets like say Goodwill, brand name, patents need to be amortized. Now, how to calculate? Now, it should commence when the asset is available for use. So, as soon as the business of B is taken over by A, it has started using B's reputation. So, immediately the Goodwill should also be amortized. Now, estimation of useful life generally becomes less reliable, because somebody may say, let us say we have purchased machinery. We know that we can use it for 3 years, 5 years, 6 years, etcetera. As per the manufacturer specification, it is easy to use. However, it is very difficult to estimate how long you can use Goodwill, because Goodwill is something which may be useful forever. At the same time, unless the policies of the new business are good, we cannot use Goodwill for a longer period, because even if A takes over B, eventually it will have to develop its own policies. It will have to be good to people, then only the reputation can be maintained. So, it is illogical to say that Goodwill of B can be used by A forever. That is why accounting standards provide that you cannot have a very long life for writing of intangible asset. So, maximum cap for writing of any intangible asset is kept at 10 years. So, we can assume that Goodwill also should not be amortized for a period in excess of 10 years. It has to be written off within first 10 years itself. Further, now you can use a variety of amortization methods, just as in depreciation we saw various methods. Do you remember them? So, we have seen there is a straight line method, there is a reducing balance method, there is a machine hour method. In the same way, for amortizing Goodwill, usually written down value method or reducing balance method is used. Sometimes straight line method is used, different methods of depreciation are applied so that the cost of Goodwill which is paid gets written off over the period of its useful life. So, these methods include various methods like we have seen. Now, Goodwill arising on business purchases represents the amount paid in anticipation of future income. So, as we estimate when we will receive income in the same proportion it is logical to amortize it. Now, the Goodwill is such that you cannot hope to make the business by using some other persons good name for a very long time. That is why AS 14, which talks about Goodwill says that Goodwill should be written off usually within 5 years. Only in exceptional circumstances you can use a longer period. That also cannot be longer than 10 years. And the norm is Goodwill is written off within 3 to 5 years. Now, let us take an example. Now, suppose Goodwill is 10 crore. Say company expects that during next 4 years such Goodwill should be written off and they are using straight line method. So, how much is the amortization charge each year? Of course, it is pretty simple. You know that the value of Goodwill is 10 crore. You also know that the period it should be written off is 4 and it is equally it is on a straight line basis. So, 10 by 4 that means 2.5 crores is the amount of Goodwill which should be written off each year. So, I trust you have understood the concept of Goodwill and its amortization. Now, let us go to the next concept that is about inventory. In this module we are discussing earlier we discussed about depreciation. Then we also discussed the concept of conservatism, the concept of provision. Now, we have completed the concept of Goodwill and we are starting with inventory and its valuation. Now, what is inventory? How do you define inventory? Now, popularly the term stock is also used for inventory and it includes fixed assets, the finished goods. It includes something which is known as work in progress and it also includes raw material. As you all know it is a tangible current asset. So, you can see you can feel the inventory it has to be usually kept in go downs or in stores that is why it is tangible in nature. It is current asset because it is not supposed to be kept like a machine. It is not a fixed asset which will be there in the business forever. It is a current asset and usually you are supposed to have a rolling life cycle. You will buy inventory you will sell it out or you will buy raw material use it for consumption. You will make finished goods you will sell them out. So, inventory is a moving item that is why it is defined as a tangible current asset and it consists of finished goods, work in progress and raw materials. Now, let us look at the formal definition of inventory as per international accounting standard IAS 2.6. Again the same thing is given that these are the assets which are held for sale in the normal course of business when it is a finished goods stock or the assets in the production process which is meant again for a normal course of business which we call work in progress or the materials and supplies that are for consumption in the production which we call as raw material. So, all these three things are included in the term inventory. Now, the question is valuation of inventory keep in mind that the valuation of inventory is extremely important for preparing proper financial statement because inventory is one of the few items that is going to be there both in profit and loss account and also in the balance sheet. Because on one hand the amount of inventory which is there in the go downs is shown in the income statement as reducing the cost that is why more the inventory your profits will rise. On the other hand inventory being a current asset it is shown in the balance sheet as an asset. So, if your inventory value is high your financial position is also better that is why any manipulation in the value of inventory or any increase in the value of inventory will significantly show a better profitability and at the same time it will also show a better financial position. On the other hand if business tries to understate or undervalue its inventory profit will be undervalued and the financial position also will be somewhat understated. That is why it is very very important that proper valuation of inventory is done. Now, the question is how to value the inventory? Naturally since we use cost concept all assets should be valued at cost. So, inventory is also normally valued at cost. Now, it is very important to know what are the items which are included in the cost of inventory? Here I have tried to list such items first is of course the cost of acquisition. So, suppose I have raw material which I have purchased for say 4000 rupees 4000 is the main cost of raw material I will also include the cost of transportation. So, if I have paid 500 rupees for the transporter to bring the inventory from the place where I have purchased to my go down. So, the cost of inventory will become 4000 plus 500. So, I do include all those cost to bring the inventory to my location. So, it will include carriage inward, freight, import duties, taxes like octribe which are necessary which are required to be paid to change the location of inventory and bring them to my place. It will also include on those cost which are incurred to change the condition of inventory. For example, if I have purchased raw material and I process it. So, I incur my labor, I incur the cost of electricity, I incur the cost of various items which I may add or the packing which I provide. So, all these from inventory if I say let us say I have purchased the raw material at 4000, I have paid 500 for freight. So, the cost of raw material was 4500, I have incurred 10000 on it to convert it into finished goods. So, 4500 plus 3000, the cost of finished good inventory will become 14500. So, here the definition as per international accounting standard 2.10 is given. So, cost of inventory is to include number 1, the cost of purchase which is pretty common sense what you pay for, but you should not forget to include taxes, transportation and handling charges on all the purchases. But you will have to reduce the cost of the discount which you avail. That is why it is a cost of purchase net of trade discount. Secondly, it will include the cost of conversion especially when you are manufacturing a finished good, you buy raw material and you convert it into finished goods. So, those cost of conversion are to be added. Now, you may remember that the costs are of two types, you have some variable cost, some fixed cost, both these costs are to be added. So, second item is cost of conversion. Second item if you have incurred any extra cost which are required to bring the item to present location and condition. Location we have already discussed let us say transportation or condition. So, you might have done some finishing or you might have applied some attractive packing which increases the cost of item that will also be added. That is why all these three components cost of purchase, the cost of conversion and other related costs, these three comprise of what is known as cost of inventory as per international accounting standard 2.10. Now, what is inventory and how will you value? We have already seen how to calculate the cost, but it is not necessary that inventory is always valued at cost. We were just discussing that we have a raw material of 4000, we incurred 500 on the same. So, 4500 plus 10000, so 14500 was the cost of finished goods which I have produced. Unfortunately, the market value of that item is only 13000. Now, should I value the inventory at 14500 or at 13000? The answer is I should value it only at 13000 because I am going to sell it only at 13000. That is why I cannot show it at 14500 though I might have incurred the cost. Suppose you take another example, let us say I have manufactured a raw material by incurring 14500, it has been a I mean it is a good process. The output is highly valued, so it has a market value of 20000. So now, I have a cost of 14500, the market value is 20, so inventory will be valued at how much? 14500 or 20, again the answer is I should value it at cost only. Now, I cannot take the market value of 20, so the rule is inventory should be valued at cost or net realizable value whichever is lower. This is as per accounting standard 2 or as per IAS 2.9. If you remember, we have discussed the concept of conservatism. So, what conservatism says is if you have made any profit do not account for it unless it is realized. So, if my cost is 14500, market value is 20, there is a hidden profit, but I will not record it because it is yet to be realized. However, if losses are incurred, they should be immediately provided. So, if my cost is 14500 and market value has gone down to 13, so there is a loss of 1500, I will not wait till it is realized. As soon as I know the loss, I will immediately reduce the value of my inventory from 1400 to 13. That is why the rule is inventory should be valued at cost or net realizable value whichever is less. So, I think there is a clarity. Now, what do you mean by net realizable value? Loosely speaking, we can say that the market value is net realizable value, but there is a slight difference. Net realizable value is an estimated selling price in the ordinary course of business. So, it is basically a market price, but minus the estimated cost of completion and estimation necessary to make the sale. So, in our example, we were saying that the cost is 14500, the market value is 13000, but suppose to sell it, I have to incur some commission. So, when I sell the product at 13, actually I have to pay 1000 rupees to the seller as a sales commission and I actually realize only 12. So, in that case, the market value will be taken at 12 and not at 13. So, market value in a way is 13, but market value minus commission, net realizable value is still. So, net realizable value is nothing but market value minus the relevant costs, which are necessary for sale. Now, let us take one simple example. So, if you have some semi-finished goods in hand, let us say for year ended March 11-12, the cost of semi-finished product is 70000 and this product can be finished by incurring further cost of 10000 in coming year. So, how much should be the value of inventory? About the market value, it is given that this product can be sold at 60000 subject to selling commission of 5 percent on the selling price. So, determine the value of inventory. Let us look at it again. So, you have the data of both now cost as well as market prices. So, think over what will be the value of inventory. So, what is the rule of valuation? Rule of valuation is cost or net realizable value, whichever is less. So, let us try to calculate first cost and net realizable value. So, how much is a net realizable value? It is given in the problem that the selling price is 60, but I have to incur 10000 rupees as a extra cost to complete the product. So, 60 minus 10 minus I also have to pay commission of 5 percent on the selling price. So, 60 less 10 less 3, my net realizable value comes to 47 and as you know my cost is as high as 70. So, NRV of 47 versus the cost of 70, as a rule I will take the lower of the two. So, valuation of inventory becomes 47500. Now, let us also try to understand some techniques of inventory valuation. Now, what happens is in the cases which we were discussing we had only one item, but actually in business hundreds of units of the same item keep on coming at a different dates. So, some raw material same raw material say let us say we have a raw material X it is purchased on 2nd of January it is again purchased from 4th of January it is again purchased on 6th of January all of these purchases are different rates. Now the problem is which of this should be taken at the as a value as on the valuation date as on the balance sheet date. So, there are a variety of methods as you can see here one is specific identification method there is a first in first out or FIFO method last in first out weighted average price adjusted selling price and so on. So, in specific identification method you exactly know which item has gone out. So, each item is specifically identifiable then it is possible to attribute the cost of that item to that specific item. So, this method is the simplest and most systematic because you exactly know the item and you allocate the cost of that item only to that item. However, in practice it is not possible for all the items because many items may be interchangeable. Now, can you tell me for which items for example, we can use specific identification just imagine the go downs of different types of industries which some can use specific identification some cannot use. Can you just think over which can use which cannot use let us say you are a dealer in vehicles. So, each vehicle has a registration number. So, you specifically there is also a chassis number. So, you specifically know a vehicle it is a costly item also. So, each vehicle can be specifically identified you can use specific identification method same way for which item you can use specific identification there are specialized items. Let us say in a in case of say designer clothes each item of clothing which is made is a very special and a costly item each item is different from other items. So, it is possible to use specific identification and where you cannot use that is the case where items are interchangeable. Let us say you are dealing in vegetables. So, you buy potatoes. So, you buy hundreds and thousands of potatoes from different sources all potatoes are interchangeable you cannot have any particular tack for each potato. Same way for items like FMCG let us say soaps let us say eatables you may be buying large number. So, it is not possible to identify which item has come at what time and so on. That is why though specific identification method is a very suitable method it cannot be used for all the items. So, there are some other methods there is a method popularly known as FIFO or first in first out method is a very logical method. So, what is assumed is if you have number of items coming in the first item which is received is issued out first. So, naturally what you have in hand consists of the latest received items. Let us see an example here. So, this is a list of purchases which are made in the month of June 2012. So, you know the date unit and the prices. So, 5 items 5 times the item same item 5 times purchase all units are identical. So, you have 12, 17, 20, 22nd and 27, 5 times the purchases are made and during the year or during the month 20,000 units are issued. So, you are asked to determine the value of stock. How will you value? First thing you have to do is first calculate how much is a total purchase in the month. So, you will realize that total material coming in is 24,900 of which 20 is issued. So, you have 4,900 units of closing stock as you know the rule is first in is first out. So, the purchases of 12, 17 and 20 have already been issued. What is in stock is from the purchases of 22nd and 27. So, first we will know that whatever is from 27 that is 2000 they are all there with us and out of the purchases of 22nd 2,900 units are there. So, you are clear. So, I know that I have 4,900 units. First the last item that is 2000 units at rupees 13 and then remaining that is 2,900 units at rupees 11. So, valuation you can see here 2000 into 13 so 26,000 and 2,900 into 11 so 31,900 so value of closing stock is 57,900. So, this is about the first method first in first out there are also other methods like LIFO, weighted average, moving average and so on we will see them in the next session. Thank you so much.