8: INVENTORY

Opening inventory: Dr Cost of sales (I/S) Cr Inventories (SOFP) Closing inventory: Dr Inventories (SOFP) Cr Cost of sales (I/S)

Chapter Summary

Accounting adjustments

Inventory

Valuation
'Inventories should be measured at the lower of cost and net realisable value' This is on a line by line basis

Effects on profit
Closing inventory valuation will differ depending on cost method used This has a direct impact on cost of sales and therefore on gross profit When prices are rising FIFO will give higher inventory values and therefore higher profits

Cost
Cost includes: - costs of purchase - costs of conversion - other costs

Net realisable value

Calculation: Selling price Less: completion costs Less: selling costs

X (X) (X) X

Methods of estimating cost

FIFO

AVCO

'First in, first out' The first goods purchased will be the first sold Year-end inventories relate to the most recent purchases

'Average cost' Simple average calculation: Total purchases cost total number of units purchased Weighted average (required by IAS 2): A new average is recalculated each time inventories are purchased

160