Inventories – Part 1 

 
 
In this training agenda, we will cover: 
 
1) Definition of Inventories. 
2) Measurement of inventories. 
3) Costing method. 
 
In this clip, we will cover 2) Measurement of inventories and 3) Costing method.
 
In accordance with I A S 2, inventories shall be measured at the lower of cost, and
net realisable value, (N R V). 
 
The cost of inventories include all costs of purchase, costs of conversion, and other costs incurred in
bringing the inventories to their present location and condition. 
 
The cost of purchase of inventories include:  

 The purchase price, import duties and other taxes.  

 Transport, handling, and other costs directly attributable to the acquisition of finished
goods, materials and services, and.  
 Less of all trade discounts and rebates. 
 
The cost of conversion is directly related to: 
(a) The units of production (for example, the direct material, or direct labour).  
(b) Production overhead. 
(c) Other costs incurred in bringing the inventories to their present location, and. 
(d) Condition or transport cost 
 
{3 second break}

For Costing method, first, let us understand the items in a cost formula. 

 
The cost of inventories of items that are not ordinarily interchangeable, including goods or services
produced and segregated for specific projects, shall be assigned by: 
(a) Using specific cost of their individual cost. 
 
The cost of inventories other than those dealt with the above shall be assigned by: 
(a) Using the first-in, first-out (F I F O), or. 
(b) Weighted average cost formula. 
 
The Net Realisable Value (NRV) 
 
NRV is the estimated selling price in the ordinary course of business, less the estimated costs of
completion, and the estimated costs necessary to make the sale. 
 
NRV equals to: 
The estimated selling price, less the estimated cost of completion, less the estimate selling cost 
 
However, this measurement is not applicable to: 
 Producers of agricultural products, forest products, mineral products, and commodity
broker-traders. 
 
Recording Inventories 
 
There are 2 systems to record when recording inventories: 
First, the Periodic System, and. 
Second, the Perpetual system. 
 
Periodic System 
The Company uses an occasional physical count to measure the level of inventory, and the cost
of goods sold or (C O G S). 
 
This means that the Company should record all purchases for inventories in the profit and loss
statements as purchase, or C O G S.  
 
At the end of the year, the purchase in profit and loss statements need to be adjusted on the
inventories movement, which is calculated by:  
Opening inventories, less ending inventories. 
 
Perpetual System 
The Perpetual System keeps track of inventory balances continuously, with updates made
automatically whenever a product is received or sold. 
 
This means that all the purchases will be recorded in the inventories balance in the balance sheet,
and each time a sales occurs, the item listed in inventories will be transferred to C O G S. 
 
Since the transfer to C O G S needs to occur, the Company will need to have an automatic perpetual
inventory system on every transaction in their accounting software. This could be expensive as the
software needs to be automated in the recording system.  
 
In general, the Periodic System is usually better suited for small businesses, while larger businesses
with higher sales volume and multiple outlets would need the Perpetual System. 
 
This is the end of our training session for Inventories, part 1.