IAS 2 Inventory

IAS 2 does not apply to

Work in progress arising under construction contracts including directly related service contracts Financial instruments Biological assets relating to agricultural activity and agricultural product at the point of harvest Producers of agricultural and forest products, minerals and mining products etc Commodity broker traders that measure their inventories at fair value less selling costs These are all covered under specific standards.

Definition of Inventory
Held for sale in the ordinary course of business In the process of production for such sale (WIP) In the form of materials or supplies to be consumed in the production process or the rendering of services.

Valuation of Inventory
Physical Inventory Count at end of year guarantees correct quantities Impacts on profits and tax liability in the Statement of Profit & Loss Strengthens the position of the Statement of Financial Position

The larger the closing inventory the smaller the cost of sales, the larger the gross profit
Trading A/C Trading Less cost of sales Opening inventory Purchases Less Closing inventory Cost of Sales GROSS PROFIT 2,000 1,500 3,500 1,200 2,300 7,700 10,000

If a company could manipulate the value of closing inventory, it could influence profit figures and tax liabilities Different types of inventory require different treatments. Eg specialist products, custom built items, products that mature in value over time, products that are work in progress etc IAS 2 was introduced to provide clarity

Fundamental Principle
Inventory valued at the lower of Cost or NRV Prudence not to overstate/understate the assets

Definition of NRV
NET Realisable Value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated cost of sale.

NRV greater than Cost but

NRV may be lower if
Damaged Obsolete Change in market demand Physical deterioration

Calculate NRV
Sale Price
further costs that may be incurred to complete the production of the item costs to sell and distribute the item

Calculating Cost
Costs of purchase including tax, import duty, transport and handling trade discount + Cost of conversion including fixed and variable overheads + other costs incurred in bringing the inventories to their present location and condition

Excluded from Cost

Abnormal waste or spoilage Factory Idle time Storage costs except when necessary in the production process before a production stage. This implies that storage costs of raw materials and finished goods are excluded. General administration overheads Marketing and other sales costs.

Measurement
1. 2. 3. 4. 5. Actual unit cost FIFO Weighted average costs Standard cost Retail method

Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method Actual Unit Cost Cost of each item valued individually by including all costs incurred to bring it to its present location and condition. Usually only feasible for highvalued, low-quantity inventory eg Car dealership

Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method First In First Out Inventory is made up of the latest purchases. LIFO method banned.

Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method Weighted Average Weighted average purchase price over the year used to value closing inventory

Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method Standard Cost Standard costs reviewed frequently to ensure that they bear a reasonable relationship to actual costs during the period

Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method Retail Method Used in retail for measuring large quantity of inventory with similar margins that are rapidly changing. Cost determined by using a reduced sale value.

Write down of inventory to NRV

Where the cost of inventories may not be recoverable e.g. goods are damaged, obsolete or selling prices declined etc. then inventories are written down to value expected to be realised from their sale or use. Inventories are usually written down to NRV on an item by item basis. Losses associated with write down are an expense in the period of the write down

Reversal of Write Down

Increase in NRV - Expense Reversal of Write Down

Disclosure
The financial statements should disclose the following: a) The accounting policies adopting in measuring inventories, including cost formulas. b) The total carrying amount of inventories broken into appropriate classifications c) The carrying amount at fair value less costs to date d) The amount expended in the period e) The amount of any writedowns of inventories f) The amount of any reversal of any writedowns. g) The circumstances or events that led to the writedown(s). h) The carrying amount of inventories pledged as security for liabilities Common classifications include retail merchandise, production supplies, materials, work in progress and finished goods.

Q1
Inventories should be valued at the lower of Cost or NRV

Q2
Stock cost 60,000 NRV 40,000 40,000 x 2.5% = 1,000 Write down = 20,000 + 1,000 = 21,000
Journal Dr Cr

Inventory Write Down Expense A/C (P&L)

Inventory A/C (SFP)

21,000

21,000

Being the write down of slow moving stock

Q3
The following costs cannot be included as part of the cost of inventory:
Selling costs

Q4
Journal + receivables 55,000 + sales 50,000 + VAT 5,000 Receivables Sales VAT Journal + Expense 45,000 - CA inventory 45,000 Inventory Expense (P&L) Inventory (SFP) Dr 45,000 45,000 Dr 55,000 50,000 5,000 Cr Cr

Being the sale of goods on credit not accounted for

Being the correction of overestimation of closing stock

Q5
Write down 300,000 Journal Inventory expenses (P&L) Inventory (SFP) Dr 300,000 300,000 Cr

Being the write down of stock destroyed in fire 300,000 x 50% = 150,000 Insurance receivable CA Recoverable value Journal Insurance Compensation Receivable (SFP) Compensation receivable (SPL) Dr 150,000 Cr

150,000

Being the compensation for stock destroyed in fire

Q6
Journal + receivables 50 x 280 + sales 50 x 280 Receivables Sales Dr 14,000 14,000 Cr

Being the sale of goods on credit not accounted for 700 x 280 = 196,000 750 x 300 = 225,000 Adjustment 29,000 + expense - CA inventory Journal Inventory expense (P&L) Inventory (SFP) Being the write down of inventory to NRV Dr 29,000 29,000 Cr

Q7
NRV Selling Price Sales & Marketing Delivery to customer NRV P 150 (15) (21) 114 Q 295 (18) (40) 237

Cost Purchase Cost Delivery from Supplier Import Duty COST

P 100 20 1.20 121.20

Q 200 30 2.60 232.60

Q9
Week Open Week 1 Bought Qty 140 140 10 13 1,820 Balance 1,400 3,220

Week 2

Used

-195

140 x 10 55 x 13

1400 715
2115 1105 1985 880 1105 165 1270 715

Week 3 Week 4

Bought Used

80 -100

11 85 x 13 15 x 11

Balance AVCO (140 * 10) + (140 * 13) 280 (85*11.50) + (80*11) 160 11.61 11.50

65 11.50 * 195 11.61 * 100 2242.50 1160.00

(140 * 10) + (140 * 13) + (80*11 360 4100/360 = 11.39 65 * 11.39 = 740.27

Q10
IAS 2 states that inventory be measured as the lower of cost or Net Realisable Value Cost = cost of purchase and cost of conversion NRV = actual or estimated selling price less and further costs of conversion

Cost Materials Labour Depreciation Factory Rates Factory Expenses Other production Expenses 500 tables 1 table

NRV 15,000 Selling Price 20,000 Less Marketing Costs 10,000 1 table 5,000 50 x 225 10,000 5,000 6,500 130 250 25 225 11,250

50 x 130

6,500