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 10,000
Less cost of sales
Opening inventory 2,000
Purchases 1,500
3,500
Less Closing inventory 1,200
Cost of Sales 2,300
GROSS PROFIT 7,700
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. Actual unit cost
2. FIFO
3. Weighted average costs
4. Standard cost
5. Retail method
 Measurement
1. Actual unit cost Actual Unit Cost
2. FIFO Cost of each item valued
3. Weighted average individually by including
costs all costs incurred to bring
4. Standard cost it to its present location
and condition. Usually
5. Retail method only feasible for high-
valued, low-quantity
inventory eg Car
dealership
 Measurement
1. Actual unit cost First In First Out
2. FIFO Inventory is made up of
3. Weighted average the latest purchases.
costs LIFO method banned.
4. Standard cost
5. Retail method
 Measurement
1. Actual unit cost Weighted Average
2. FIFO Weighted average
3. Weighted average purchase price over the
costs year used to value closing
4. Standard cost inventory
5. Retail method
 Measurement
1. Actual unit cost Standard Cost
2. FIFO Standard costs reviewed
3. Weighted average frequently to ensure that
costs they bear a reasonable
4. Standard cost relationship to actual
costs during the period
5. Retail method
 Measurement
1. Actual unit cost Retail Method
2. FIFO Used in retail for
3. Weighted average measuring large quantity
costs of inventory with similar
4. Standard cost margins that are rapidly
changing. Cost
5. Retail method 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 21,000

Down Expense A/C
(P&L)
Inventory A/C (SFP) 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 Dr Cr
+ receivables 55,000
+ sales 50,000 Receivables 55,000
+ VAT 5,000
Sales 50,000

VAT 5,000
Being the sale of goods on credit not accounted for
Journal Dr Cr
+ Expense 45,000
- CA inventory 45,000 Inventory Expense 45,000
(P&L)
Inventory (SFP) 45,000

Being the correction of overestimation of closing stock

 Q5
Write down 300,000 Journal Dr Cr

Inventory expenses 300,000

(P&L)
Inventory (SFP) 300,000

Being the write down of stock destroyed in fire

Journal Dr Cr
300,000 x 50% =
150,000 Insurance
receivable CA Insurance 150,000
Compensation
Recoverable value
Receivable (SFP)
Compensation 150,000
receivable (SPL)

Being the compensation for stock destroyed in fire

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

Sales 14,000

Being the sale of goods on credit not accounted for

700 x 280 = 196,000 Journal Dr Cr

750 x 300 = 225,000
Adjustment 29,000 Inventory expense 29,000
+ expense (P&L)
- CA inventory Inventory (SFP) 29,000

Being the write down of inventory to NRV

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

Cost P Q
Purchase Cost 100 200
Delivery from Supplier 20 30
Import Duty 1.20 2.60
COST 121.20 232.60
 Q9
Week Qty Balance
Open 140 10 1,400
Week 1 Bought 140 13 1,820 3,220
Week 2 Used -195 140 x 10 1400
55 x 13 715
2115 1105
Week 3 Bought 80 11 880 1985
Week 4 Used -100 85 x 13 1105
15 x 11 165
1270 715
Balance 65
AVCO
(140 * 10) + (140 * 13) 11.50 11.50 * 195 2242.50 (140 * 10) + (140 * 13) + (80*11
280 360
(85*11.50) + (80*11) 11.61 11.61 * 100 1160.00 4100/360 = 11.39
160 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 NRV
Materials 15,000 Selling Price 250
Labour 20,000 Less Marketing Costs 25
Depreciation 10,000 1 table 225
Factory Rates 5,000 50 x 225 11,250
Factory Expenses 10,000
Other production Expenses 5,000
500 tables 6,500
1 table 130
50 x 130 6,500