Audited financial results (Accounts)

This query is : Resolved

P.S.S.Murthy

( Author )
28 May 2012

As part of expenses the following was shown:
" changes in inventories of finished goods, work in progress , stock in trade"
---appreciate a clarity of this

Soumitra Basu

( Expert )
29 May 2012

It means that method for valuation of of inventories of finished goods, work in progress and stock in trade.

P.S.S.Murthy

( Author )
29 May 2012

but why positive changes are added to p and l and negative ones are deducted?

Soumitra Basu

( Expert )
29 May 2012

Positive changes means the value of invenetories increased and that is why the profit should be enhanced. Otherwise, the contrary. Since this a trade items that are considered in Profit & Loss Account only.

P.S.S.Murthy

( Author )
29 May 2012

How come? When debits are made to p n l, the profit gets reduced.your response "since this ..... in p n l account only". I am unable to understood. Appreciate clarification

Sanjay Chauhan (IFRS)

( Expert )
29 May 2012

To make it simple, assume "T" format of profit & loss account.

In T format, on debit side we start with opening stock, purchases, expenses

On credit side we put Revenue, other income and closing stock.

Now just visualise Opening stock value and closing stock values in isolation. If closing stk value is more than opening stock, there is profit because credit side is more than debit side.

Similarly it is so otherway round.

now read this vertical format. If there is increase in inventory during the period, it means closing stock is more than opening stock. If there is decrease in inventory, it means closing stk is less than opening stk.

Concept:
Matching cost against revenue: If the goods are not sold during the year, we should not debit the current years P&L with that amount. It means we should have a cost in the current year to match the qty of sales made in the current year.

We apply increase / decrease approach because we assume that opening stock gets sold first and then current year's production.

Hope i could address your query..

P.S.S.Murthy

( Author )
30 May 2012

Mr.Chauhan

Extremely delighted and enlightened after your response.Keep up the good work sir.I wish to leverage this forum for spreading LOVE for the Accounting Profession

Sanjay Chauhan (IFRS)

( Expert )
30 May 2012

Its my pleasure..