1. Inventories should be valued at lower of cost and net realizable value.

2. Cost of inventories should include cost of purchase, cost of conversion and all costs incurred to bring the inventories to their present location and condition

3. LIFO cost formula is not permitted to be used.

4. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realisable value (of the finished products), the materials are written down to net realisable value.

5. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their
individual costs.
6. Specific identification of cost means that specific costs are attributed to identified items of inventory. This is an appropriate treatment for items that are segregated for a specific project, regardless of whether they have
been purchased or produced.However,when there are large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs is inappropriate since, in such circumstances, an enterprise could obtain predetermined effects on the net profit or loss for the period by selecting a particular method of ascertaining the items that remain in inventories.

7. The cost of inventories, other than those dealt with in paragraph 14, should be assigned by using the first-in, first-out (FIFO), or weighted average cost formula. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition.
8.Comparison between cost and net realisable value should be on item-by-item basis or on group of similar or related items basis. Aggregate comparison is not permissible.
9. The following issues on stock valuation may be noted :

Valuation of stock at “market value” (being lower than cost), should excise duty be added for the purpose of complying with section 145A? - If market value includes excise duty recoverable from customers, there is no need to add excise duty to the market value. But if excise duty is to be recovered in addition to market value, it should be added. Excise duty should also be included in the cost of the inventory. [“Issues on Tax Audit” by ICAI]
Addition of customs duty (not yet paid) to the value of imported materials kept at customs bonded warehouse? - According to section 12 of the Customs Act, 1962, customs duty shall be levied on goods imported into, or exported from, India. Section 2(23) of the said Act ‘import’ as bringing into India from a place outside India. Section 2(27) of the said Act defines ‘India as including the territorial waters of India. Therefore, the taxable event occurs when goods enter the territorial waters of India. Duty liability has arisen but is only deferred by deposit in bonded warehouse. Deposit in bonded warehouse does not extinguish the duty liability. Therefore, the duty element should be added for making the adjustments under section 145A. [“Issues on Tax Audit” by ICAI]