SUMMARY

IAS 2 Inventories

Overview
IAS 2 sets out the accounting treatment for inventories, including the determination of cost, the subsequent
recognition of an expense and any write-downs to net realisable value.

Scope
 Applies to all inventories except:
- work in progress on construction and service contracts (IAS 11);
- financial instruments (IAS 32 and IFRS 9); and
- biological assets arising from agricultural activity (IAS 41).

 Does not apply to the measurement of inventories held by:

- producers of agricultural and forest products, and minerals and mineral products, that are measured
at net realisable value in accordance with well-established practices in those industries; and
- commodity broker-traders who measure their inventories at fair value less costs to sell.
Changes in the above inventory values are recognised in profit or loss in the period of the change.

Definitions
 Inventories – assets that are:
- held for sale in the ordinary course of business;
- in the process of production for such sale; or
- in the form of materials or supplies to be consumed in the production process or in the rendering of
services.

 Net realisable value (NRV) - the estimated selling price less the estimated costs of completion and the
estimated costs necessary to make the sale.

 Cost of inventories – all costs incurred in bringing the inventories to their present location and condition,
including the costs of purchase and conversion.
- Costs of purchase of inventories comprise the purchase price (less trade discounts, rebates and
similar items), irrecoverable taxes, and transport, handling and other costs directly attributable to
their acquisition.
- Costs of conversion include costs directly related to the units of production, such as direct labour and
systematically allocated fixed and variable production overheads incurred in producing finished
goods.

1
 Fair value – the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.

Measurement
 Inventories shall be stated at the lower of cost and net realisable value.

 To the extent that service providers have inventories, they measure them at the costs of their production.
These costs are primarily the costs of labour directly engaged in providing the service, including
supervisory personnel, and attributable overheads.

 The cost of inventories of items that are ordinarily interchangeable and have not been produced and
segregated for specific projects is determined by using the first-in, first-out (FIFO) or weighted average
cost formula. The same cost formula shall be adopted for all inventories having a similar nature and use
to the entity.

 Inventories are usually written down to NRV on an item by item basis, unless it is more appropriate to
group similar or related items.

Recognition as an expense
 When inventories are sold, the carrying amount of those inventories should be recognised as an
expense in the period in which the related revenue is recognised.

 Any losses of inventories and the amount of any write-down to net realisable value shall be recognised
as expense in the period in which the loss or write-down occurs.

 Any reversal of any write-down of inventories that resulted from an increase in the net realisable value
shall be recognised as a reduction in the inventory expense in the period in which the reversal occurs.

Disclosure
 The following shall be disclosed in the financial statements
- the accounting policies for inventories
- the total carrying amount of inventories and the carrying amount in classifications appropriate to the
entity
- the carrying amount of inventories carried at fair value less costs to sell
- the amount of inventories recognised as an expense during the period

Examples of costs excluded from the cost of inventories and recognized as an expense
when they are incurred:
 Abnormal amounts of wasted materials, labour or other production costs;
 Storage costs, unless those costs are necessary in the production process before a further production stage;
 Administrative overheads that do not contribute to bringing inventories to their present location and condition; and
 Selling costs.

- the amount of any write-down of inventories recognised as an expense

- the amount of any reversal of any write-down that is recognised as a reduction in the amount of
inventories recognised as an expense
- the circumstances or events that led to the reversal of a write-down of inventories
- the carrying amount of inventories pledged as security for liabilities.

IAS 2 Inventories 2
IAS 2 Question 1

QUESTION 1 – IAS 2 INVENTORIES (ICAP C6 AUTUMN 2002 Q4)

Mr. Bashir, a whole sale general merchant does not keep proper records of his business
transactions but inventory taking is done at the end of each six months and inventory is valued at
cost for estimating half yearly profits. He charges gross margin of 33 1/3% on cost for all his sales.
You are given the following figures for the half year ended 31 December, 2001 relating to his
business:
(a) The total of sales as per invoices entered in the sales register form July to December 2001
amounted to Rs. 4,032,300. This amount includes Rs. 302,100 relating to goods delivered
to customers on or before 30 June 2001. The total of goods delivered to customers before
31 December 2001 but invoiced during first week of January 2002 was Rs. 413,400.

(b) The total of purchase invoices entered into purchase register during July to December 2001
was Rs. 3,043,500 and this amount includes Rs. 220,500 for the goods received on or
before June 30, 2001.

Purchase invoices relating to goods received in December 2001 but which were entered in
the purchase register in 1st week of January, 2002 amounted to Rs. 291,000.

(c) The inventory sheets as on 30 June 2001 revealed:

(i) 120 items of woolen jerseys, the cost of which was Rs. 150 each, but had been
valued at Rs. 15 each.
(ii) the total inventory in woolen goods section was Rs. 394,500 but had been included
in the inventory sheets as Rs. 439,500.

(d) The value of inventory at cost as on 30 June 2001 was Rs. 3,198,000.

Required:
Calculate the correct value of inventory on 31 December 2001.
(10 marks)

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IAS 2 Question 1

ANSWER 1 – IAS 2 INVENTORIES (ICAP C6 AUTUMN 2002 Q4)

Mr. Bashir – Closing Inventories as at December 31, 2001

Rupees
Opening inventory 3,198,000
Adjustment of errors:
Undervalued items (120 x 135) (Note-2) 16,200
Overvalued (Note-3) (45,000)
Adjusted opening inventory 3,169,200
Purchases (Note-4) 3,114,000
Cost of sales (Note-5) (3,107,700)
Value of closing inventory 3,175,500

Notes
1. Mr. Bashir is a wholesale general merchant and uses retail method of accounting for
valuation of closing inventory with a gross margin of 33.33% on cost of sales.
2. Differential of 135 (150-15) is added for value of 120 items in the cost/value of inventory.
3. Overvalued inventory 439,500 – 394,500 = 45,000
4. Purchases 3,043,500 – 220,500 + 291,000 = 3,114,000
5. Cost of sales (4,032,300 – 302,100 + 413,400) x 100/133.33 = 3,107,700

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IAS 2 Question 2

QUESTION 2 – IAS 2 INVENTORIES (ICAP C6 Spring 2003 Q3b)

The inventory in Trade value was Rs.560,000 for year ended June 30, 2002, however, following
discrepancies found
(i) Inventory sent to customer on approval for Rs.45,000 but no invoice raise. Customer also
did not approve that inventory.

(ii) Advance Income Tax included in valuation of imported material for Rs.38,000.

(iii) 550 units of one raw material valued at Rs.90 instead of cost Rs.900.

(iv) A machine parts cost Rs.10,500 included in physical verification sheet of inventory in trade.

REQUIRED:
Calculate correct valuation of closing inventory.
(05 marks)

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IAS 2 Question 2

ANSWER 2 – IAS 2 INVENTORIES (ICAP C6 Spring 2003 Q3b)

Rupees
Value of stock as per question 560,000
Sales on approval basis (Note-1) 45,000
Advance income tax (38,000)
Undervalued units (Note-2) 445,500
Machine parts wrongly included in stock (10,500)
Closing value of stock 1,002,000

Notes
1. Goods of Rs. 45,000 are included in stock as the risks and rewards are not transferred to
the buyer and buyer has not approved the sales.
2. Undervalued items
(900 – 90) x 550 = 445,500

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IAS 2 Question 3

QUESTION 3 – IAS 2 INVENTORIES (ICAP C6 Spring 2005 Q3)

During the night of 15th December 2004, flood water entered in the warehouse of Fine Distributors
and destroyed the entire inventory. Certain information relating to the period from 1st July to 14th
December, 2004 is however, available at the Sales Office of the company.

Rupees
Gross sales 9,625,000
Opening inventories 1,250,000
Gross purchases 8,250,000
Un-recorded sales 625,000
Sales return 1,250,000
Purchase return 375,000
Freight on purchase 1,250,000
Mark up on cost 20%

Required:
Calculate the Cost of Inventories, for which the company should lodge an insurance claim.
(6 marks)

Page 1 of 2 (kashifadeel.com)
IAS 2 Question 3

ANSWER 3 – IAS 2 INVENTORIES (ICAP C6 Spring 2005 Q3)

Rupees
Opening stock 1,250,000
Purchases (Note-1) 9,125,000
Cost of sales (Note-2) (7,500,000)
Amount of insurance claim / loss caused by fire 2,875,000

Notes
1. Purchases 8,250,000 – 375,000 +1,250,000 = 9,125,000
2. Cost of sales (9,625,000 + 625,000 – 1,250,000) x 100/120 = 7,500,000

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IAS 2 Question 4

QUESTION 4 – IAS 2 INVENTORIES (ICAP C6 AUTUMN 2001 Q3b)

From the data given below, compute the value of inventory in hand (800 units) in accordance with
the requirements of IAS 2.

Rs.
Invoice price (including sales tax) - 1000 units 11,150
Cost of material 8,250
Income Tax paid at import stage 800
Custom duty 600
Sales Tax (refundable) 2,000
Transport charges 500
Material handling charges 400
Store rent 300
Discounts allowed 250
Indirect labour 200
Variable overhead 130
Depreciation 520
Selling expenses 220
Maintenance of factory equipment 300
Designing charges 550
Material wasted 250

(07 marks)

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IAS 2 Question 4

ANSWER 4 – IAS 2 INVENTORIES (ICAP C6 AUTUMN 2001 Q3b)

Value of closing inventory (800 units) Rs. 7,144

Cost Rupees
Cost of material Rs. 8,250 – 250 material wasted 8,000
Income tax paid on import stage 800
Customs duty 600
Transport charges 500
Material handling charges 400
Indirect labour 200
Variable overheads 130
Depreciation 520
Maintenance of factory equipment 300
Designing charges 550
Total cost (1,000 units) 12,000
Value of closing inventory Rs. 12,000 / 1,000 units x 800 units 9,600

Net Realizable Value (NRV) Rupees

Estimated selling price (1,000 units) Rs. 11,150 – Rs. 2,000 sales tax 9,150
Selling expenses 220
NRV 8,930
Value of closing inventory Rs. 8,930 / 1,000 units x 800 units 7,144

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IAS 2 Question 5

QUESTION 5 – IAS 2 INVENTORIES (ICAP C6 AUTUMN 2003 Q7)

Azhar and Company are importers of a particular item. Accountant of the company has prepared
the Profit and Loss Account following average method for valuation of closing inventory.

Following are the details of transactions during the year:

Amount in
Date Quantity Rupees
Opening inventory 1,000

Purchases 05-07-2002 5,000 3,250,000

10-09-2002 14,000 8,750,000
26-12-2002 9,500 6,650,000
24-03-2003 18,600 13,857,000
05-04-2003 15,600 11,310,000
31-05-2003 10,100 6,969,000

Sales 57,000

Closing inventory 16,800

The Profit and Loss Account prepared by the Accountant on average method of valuation of
closing inventory is as follows:
PROFIT AND LOSS ACCOUNT
Rs. Rs.
Sales 41,325,000
Cost of sales
Opening inventory 560,000
Purchases 50,786,000
51,346,000
Less: Closing inventory 11,688,250 39,657,480
Gross Profit 1,667,520
Operating and selling expenses 1,525,900
Net profit 141,620

Required:
Prepare a revised Profit & Loss Account based on FIFO method for valuation of closing inventory
at cost or net realizable value whichever is lower. The selling expenses are 2% of sales.
(10 marks)

Page 1 of 2 (kashifadeel.com)
IAS 2 Question 5

ANSWER 5 – IAS 2 INVENTORIES (ICAP C6 AUTUMN 2003 Q7)

Azhar and Company

Revised profit and loss account for the year ended June 30, 2003
Rupees Rupees
Sales 41,325,000
Cost of sales
Opening stock 560,000
Purchases 50,786,000
51,346,000
Closing stock (Note-1) (11,826,500) (39,519,500)
Gross profit 1,805,500
Operating and selling expenses (1,525,900)
Net profit 279,600

Notes
1. Cost of closing stock
Units Cost per unit Total cost
10,100 690 6,969,000
6,700 725 4,857,500
16,800 11,826,500

NRV of closing stock

NRV per unit 41,325,000/57,000 = 725 x 98% = 710.5
Value of 16,800 units 11,936,400

As the cost of closing stock is less than its NRV, it is recorded at ‘Cost’.

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IAS 2 Question 6

QUESTION 6 – IAS 2 (ICAP CAF5 S17)

Nawaz Manufacturing Limited (NML) deals in various products. One of its product B2 is produced
using raw material A1. Production is carried out after receiving confirmed sales order. Following
information is available for the month of January 2017:

(i) Opening inventory of A1 was 200 kg @ Rs. 3,000 per kg.

(ii) Details of purchases made during the month ended 31 January 2017 are as follows:
Date Quantity (kg) Price per kg (Rs.)
1-Jan-17 250 2,800
15-Jan-17 250 2,900

50 kg of A1 purchased on 15 January 2017 were returned to the supplier on 16 January

2017 due to inferior quality of material supplied.

(iii) On 18 January 2017, 100 kg of A1 were destroyed. They had no scrap value.

(iv) Under normal circumstances 500 kg of A1 produce 400 liters of B2.

(v) Labour cost per liter of B2 was Rs. 700.

(vi) Overheads are estimated at 120% of labour cost. The actual overheads for the month were
Rs. 275,000.

(vii) There is no opening and closing work in progress.

(viii) Sales of B2 during the month of January were as follows:

Sale order date Delivery date Quantity (liters) Sales price per liter (Rs.)
2-Jan-17 4-Jan-17 100 7,000
26-Jan-17 28-Jan-17 160 6,250

(ix) NML uses weighted average method for valuation of inventory.

Required:
Prepare cost of goods sold statement for the month of January 2017 under each of the following
methods:
(a) Perpetual inventory method (10)
(b) Periodic inventory method (05)

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IAS 2 Question 6

ANSWER 6 – IAS 2 (ICAP CAF5 S17)

Part (a) Perpetual inventory

Material A
Date Description
Quantity Kg. Per unit cost Rs. Amount Rs.
31-Dec- 16 Opening stock 200 3,000 600,000
1-Jan-17 Purchases 250 2,800 700,000
Balance 450 2,888.89 1,300,000
2-Jan-17 Issuance (100x5/4) (125) 2,888.89 (361,111)
Balance 325 2,888.89 938,889
15-Jan-17 Purchases 250 2,900 725,000
Balance 575 2,893.72 1,663,889
16-Jan-17 Purchase return (50) 2,900 (145,000)
Balance 525 2,893.12 1,518,889
18-Jan-17 Abnormal loss (100) 2,893.12 (289,312)
Balance 425 2,893.12 1,229,577
26-Jan-17 Issuance (160x5/4) (200) 2,893.12 (578,624)
Balance 225 2,893.12 650,952

Cost of Goods sold

Date Description Labour @ Rs. FOH @ 120% Cost of
Material
700 per litre of labour goods sold
Rupees
4-Jan 17 Sale (100 litres) 361,111 70,000 84,000 515,111
28-Jan-17 Sale (160 litre) 578,264 112,000 134,400 824,664
939,375 182,000 218,400 1,339,775
Under absorption of overheads (275,000-218,400) 56,600
Total cost of goods sold 1,396,375

Part (b) Periodic inventory

Quantity Rate Rupees
Opening inventory 200 3,000 600,000
Purchases 250 2,800 700,000
Purchases 250 2,900 725,000
Purchase return (50) 2,900 (145,000)
Balance 650 2,892.31 1,880,000

Cost of Goods sold Rupees

Cost of raw material (325 x 2,892.31) 940,001
Labour (700x260) 182,000
Overheads – actual 275,000
Cost of goods sold 1,397,001

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IAS 2 Question 7

QUESTION 7 – IAS 2 (CAF5 S18)

Kidz Party & Co. (KPC) manufactures and sells toys. Following information is available regarding four of its
inventory items as on 31 December 2017:

Cost per unit Normal selling

Items Units
(Rs.) price per unit (Rs.)
Toy cars 10,000 1,250 1,200
Doll houses 5,000 1,800 2,700
Stuffed toys 1,850 1,200 1,900
Minion costumes 870 1,500 2,500

Following information is also available:

(i) A sales order for 3,000 toy cars @ Rs. 1,100 per unit is in hand. The remaining units can be sold at
normal selling price after incurring selling cost of Rs. 150 per unit.

(ii) Doll houses include 1,000 defective units with no scrap value. 20% of the remaining doll houses are
damaged and can be sold at 50% of cost.

(iii) Stuffed toys costing Rs. 420,000 were accidentally damaged and are beyond repair. KPC plans to
sell these toys as scrap. Proceeds from such sale are estimated at Rs. 175,000 and the sale would
require transportation cost of Rs. 6,300.

(iv) All minion costumes have manufacturing faults and can be sold in present condition at Rs. 1,350 per
unit. However, 60% of the units can be rectified at a cost of Rs. 200 per unit after which they can be
sold at Rs. 1,600 per unit.

Required:
Calculate the amount at which above inventory items should be carried as on 31 December 2017 in
accordance with IAS 2 ‘Inventories’. (08)

Page 1 of 2 (kashifadeel.com)
IAS 2 Question 7

ANSWER 7 – IAS 2 (CAF5 S18)

Kidz Party & Co.
Inventory valuation
As on 31 December 2017
Normal Inventory valuation
Cost Cost to sell NRV
Units selling price at lower of cost and
per unit per unit per unit
per unit NRV
1 2 3 4 5=(3–4) 6
----------------------------------------- Rupees -----------------------------------------
Toy cars 7,000 1,250 1,200 150 1,050 NRV 7,350,000
3,000 1,250 1,100 - 1,100 NRV 3,300,000
10,000 10,650,000

Doll houses 1,000 1,800 - - NRV -

800 W1 1,800 900 W2 - 900 NRV 720,000
3,200 1,800 2,700 - 2,700 Cost 5,760,000
5,000 6,480,000

Stuffed toys 350 W3 1,200 500 W4 18 W5 482 NRV 168,700

1,500 1,200 1,900 - 1,900 Cost 1,800,000
1,850 1,968,700

Minion costumes 522 W6 1,500 1,600 200 1,400 NRV 730,800

348 1,500 1,350 - 1,350 NRV 469,800
870 1,200,600

20,299,300

W1  [5,000-1,000]) × 20% = 800

W2  1800 x 50% = 900
W3  (420,000 / 1,200) = 350
W4  (175,000 / 350) = Rs. 500
W5  (6,300 / 350) = 18
W6  (870×60%) = 522

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IAS 2 Questions
1. Prepare brief notes for a company board meeting to answer the following points for the
directors:

(a) Explain the term ‘inventories’ as defined by IAS 2, Inventories.

(b) State which costs should be included when measuring the value of inventories

(c) State which costs should NOT be included when measuring the value of inventories.

Answer

(a) Inventories are assets held for sale in the ordinary course of business. Companies
often have inventories in various forms:
 raw materials, for use in a manufacturing business
 work-in-progress (partly manufactured goods)
 finished goods, made by the business and ready for resale to customers
 finished goods, which have been bought in by the business for resale
(b) Costs should include the following:
 costs of purchase (including taxes, transport and handling) net of trade
discounts
 costs of conversion (including fixed and variable overheads)
 other costs incurred in bringing the inventories to their present location and
condition
(c) Inventory costs should not include:

 abnormal waste
 storage costs
 administrative overheads not related to production
 selling costs
 interest cost when inventories are purchased with deferred settlement terms

2. A company has carried out its stock take at the end of its financial year. Included in its
inventories are the following items:

(a) A table that cost the company £1,250. This type of table usually sells for £1,895 but it
was damaged in a flood and will therefore be sold at a significant discount. It is
expected to sell for £450

(b) A wardrobe that cost the company £720 and normally sells for £995. The wardrobe
has been damaged and will cost approximately £120 to repair at which point it can be
sold for £750

(c) A dresser that was made to a customer’s own specifications and cost the company
£1,832 to make. Unfortunately, the customer went bankrupt and could not purchase
the item. Due to the unusual design the dresser was not easy to sell. After the year-
end however, the company sold the dresser for £2,250 but incurred commission
costs on the sale of £105 and delivery costs of £158
 State the value that each of the above items will be included at in the company’s year-
end inventory
Answers: Each item should be valued at the lower of cost and net realisable value

a) Table: cost is £1,250

NRV: expected selling price is £450
This item should be valued at £450 (NRV)

b) Wardrobe: cost is £720

NRV: expected selling price less repair cost (£750 - £120) i.e. £630
This item should be valued at £630 (NRV)

c) Dresser: cost is £1,832

NRV: expected selling price less commission less delivery costs (£2250
less £105 less £158) i.e. £1,987
This item should be valued at £1,832 (cost)

3. A company holds three distinct types of inventory in its warehouse at the end of its
financial year. These are valued as follows:

Inventory FIFO (cost) £ LIFO (cost) £ NRV £ VALUE IN

ACCOUNTS
Type A 8,300 8,000 12,200 8,300

Type B 10,500 10,700 10,200 10,200

Type C 12,300 12,000 14,500 12,300

Total 31,100 30,700 36,900 30,800

Task. Calculate the value of inventory to be included in the company’s year-end

accounts
NB. Value is the lower of FIFO and NRV (LIFO is not permitted)

4. Elizabeth Ogier is the Managing Director and major shareholder of Ogier

Perfumes Limited, awholesale perfume business. She has asked you to assist in
the preparation of the year end financial statements of the company.
 The inventories at the close of business on 30 September 20-9 were valued at cost
at £49,477. However, included in this balance were some items which had cost
£8,200 but it is estimated that they could now be sold for only £4,800.
 The purchases figure includes items to the value of £2,000 which Elizabeth took for
personal use and for gifts to friends.

Task
Draft a letter to Ms Ogier justifying any adjustments you have made to:
  the inventories valuation on 30 September 20-9
 the balances in the trial balance as a result of her taking items from the company for
personal use or for gifts to friends

Your explanation should make reference, where relevant, to accounting concepts and
applicable accounting standards.

Dear Ms Ogier
Re: Ogier Perfumes Limited
I am writing to you to explain some of the adjustments that I have made to the
balances in the company accounts at 30 September 20-9.
The first adjustment is to the figure for inventories which was valued at cost at
£49,477. It is necessary to adjust the figure for inventories at the close of business on
30 September. The valuation of £49,477 includes items which had cost £8,200, but
which could now be sold for only £4,800.
IAS 2, Inventories, requires that inventories be valued at cost, or, if lower, at net
realisable value. As the net realisable value is lower than cost, these items must be
included in the financial statements at their net realisable value of £4,800. Hence, the
total value of inventories in the financial statements should be £46,077.
The second adjustment is to the purchases figure in the trial balance. Under the
business entity concept, the financial statements record and report on the activities of
the entity and must not include personal transactions of those who play a part in
owning or running the entity. As some of the purchases were used for personal use
they cannot be classed as expenses of the company. Hence, they must be deducted
from purchases and treated as part of your director’s emoluments from the company.
If you have any questions relating to these adjustments do not hesitate to contact me.
Yours sincerely

Accounting Technician