Valuation of closing stock in different situations

Second approach is correct. The reason behind this is:

According to AS 2 VALUATION OF INVENTORY, all cost related with the procurement of goods and which is necessary to bring the inventory to its present location and condition shall be included.

So, inward freight will also form a part of closing stock.

Thanks Payal for your reply.  I hope you would not mind my few queries.  

Cost of Goods Sold = Opening Stock + Purchases A/c + Direct Expenses - Closing Stock

In Trading Account all direct expenses are debited so they become part of COGS.  I agree as per AS 2 proportionate expenses should be allocated to closing stock.  But in text books, I don't find this.  Please explain.

Hello Mamta,

You are always welcome.

See, COST OF GOOGS SOLD and VALUATION OF CLOSING STOCK are both diff thing.

In COGS all direct cost accumulated which is incured for the finishedv goods to be sold. And in this administrative and selling expenses will not be included. So in another way we say it

COGS= total sale - gross profit.

In closing stock valuation only those expenses which are directly related with purchase and manufacturing of the finished goods are included.

Please give m specific ref of book in which what u read ?? And what u understand?? becuase I think U are confused about COGS and inventory valuation