This action might not be possible to undo. Are you sure you want to continue?
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 .
700 10.300 7. the larger the gross profit Trading A/C Trading Less cost of sales Opening inventory Purchases Less Closing inventory Cost of Sales GROSS PROFIT 2.200 2.500 1.The larger the closing inventory the smaller the cost of sales.500 3.000 1. Eg specialist products. products that mature in value over time. products that are work in progress etc • IAS 2 was introduced to provide clarity . it could influence profit figures and tax liabilities • Different types of inventory require different treatments. custom built items.000 • If a company could manipulate the value of closing inventory.
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 .
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 .Calculating Cost • Costs of purchase including tax.
This implies that storage costs of raw materials and finished goods are excluded. • General administration overheads • Marketing and other sales costs.Excluded from Cost • Abnormal waste or spoilage • Factory Idle time • Storage costs – except when necessary in the production process before a production stage. .
Measurement 1. Actual unit cost FIFO Weighted average costs Standard cost Retail method . 5. 2. 4. 3.
Weighted average costs 4. Actual unit cost 2. 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.Measurement 1. Standard cost 5. FIFO 3. Usually only feasible for highvalued. low-quantity inventory eg Car dealership .
. Actual unit cost 2. Standard cost 5. Weighted average costs 4. FIFO 3. Retail method • First In First Out Inventory is made up of the latest purchases. LIFO method banned.Measurement 1.
Actual unit cost 2.Measurement 1. Standard cost 5. FIFO 3. Weighted average costs 4. Retail method • Weighted Average Weighted average purchase price over the year used to value closing inventory .
Standard cost 5. Weighted average costs 4. FIFO 3.Measurement 1. Retail method • Standard Cost Standard costs reviewed frequently to ensure that they bear a reasonable relationship to actual costs during the period . Actual unit cost 2.
Actual unit cost 2. FIFO 3.Measurement 1. Weighted average costs 4. . Cost determined by using a reduced sale value. Retail method • Retail Method Used in retail for measuring large quantity of inventory with similar margins that are rapidly changing. Standard cost 5.
then inventories are written down to value expected to be realised from their sale or use.g. obsolete or selling prices declined etc.Write down of inventory to NRV • Where the cost of inventories may not be recoverable e. goods are damaged. • Losses associated with write down are an expense in the period of the write down . • Inventories are usually written down to NRV on an item by item basis.
Reversal of Write Down • Increase in NRV .Expense “Reversal of Write Down” .
production supplies. 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).Disclosure The financial statements should disclose the following: a) The accounting policies adopting in measuring inventories. work in progress and finished goods. materials. h) The carrying amount of inventories pledged as security for liabilities Common classifications include retail merchandise. . including cost formulas.
Q1 • Inventories should be valued at the lower of Cost or NRV .
000 + 1.000 NRV 40.000 Being the write down of slow moving stock .Q2 • • • • Stock cost 60.5% = 1.000 Journal Dr Cr Inventory Write Down Expense A/C (P&L) Inventory A/C (SFP) 21.000 21.000 x 2.000 Write down = 20.000 = 21.000 40.
Q3 • The following costs cannot be included as part of the cost of inventory: – Selling costs .
000 Receivables Sales VAT Journal • • + Expense 45.000 Inventory Expense (P&L) Inventory (SFP) Dr 45.000 5.CA inventory 45.000 + VAT 5.000 Dr 55.Q4 Journal • • • + receivables 55.000 Cr Cr Being the sale of goods on credit not accounted for Being the correction of overestimation of closing stock .000 50.000 45.000 .000 + sales 50.
Q5 • Write down 300.000 Cr • 150.000 Cr Being the write down of stock destroyed in fire • 300.000 Insurance receivable CA Recoverable value Journal Insurance Compensation Receivable (SFP) Compensation receivable (SPL) Dr 150.000 Being the compensation for stock destroyed in fire .000 x 50% = 150.000 Journal Inventory expenses (P&L) Inventory (SFP) Dr 300.000 300.
000 Adjustment 29.000 Cr Being the sale of goods on credit not accounted for • 700 x 280 = 196.000 14.000 29.CA inventory Journal Inventory expense (P&L) Inventory (SFP) Being the write down of inventory to NRV Dr 29.000 • 750 x 300 = 225.000 Cr .000 • + expense • .Q6 Journal • • + receivables 50 x 280 + sales 50 x 280 Receivables Sales Dr 14.
60 232.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 Q 200 30 2.60 .20 121.
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*11.00 (140 * 10) + (140 * 13) + (80*11 360 4100/360 = 11.820 € Balance 1.27 .50 1160.Q9 Week Open Week 1 Bought Qty 140 140 € 10 13 1.39 = 740.39 65 * 11.400 3.50) + (80*11) 160 11.61 * 100 2242.50 * 195 11.61 11.50 65 11.
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 5.250 50 x 130 6.000 1 table 5.000 50 x 225 10.000 Selling Price 20.000 6.500 .000 Less Marketing Costs 10.500 130 250 25 225 11.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.