IAS 2

Inventories

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 Overview
 OBJECTIVE
 SCOPE
 DEFINITIONS
 MEASUREMENT OF INVENTORIES
 Cost of inventories
 Cost formulas
 Net realizable value
 RECOGNITION AS AN EXPENSE
 DISCLOSURE
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 Objectives:-
To prescribe the accounting treatment for

inventories.
 To determine the amount of cost to be

recognized as an asset.

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 Scope
The Standard applies to all inventories, except:
IFRS 9 & IAS 41

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 Definition:-
Inventories are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be

consumed in the production process or in the

rendering of services.
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 Measurement
Inventories shall be measured at the lower of cost and
net realizable value.

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 Cost of inventories
The cost of inventories shall comprise all costs of

purchase, costs of conversion and other costs incurred

in bringing the inventories to their present location
and condition.

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 continued---
Costs of purchase includes:-
• purchase price
• Import duties and other taxes
• Transport, handling
• Other costs less:- Trade discounts & rebates

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 continued
Costs of conversion includes:-
• Direct labor
• Production overheads

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 continued
Examples of costs excluded from the cost of
inventories and recognized as expenses in the period
in which they are incurred are:
(a) abnormal amounts of wasted materials, labor or
other production costs;
(b) storage costs, unless those costs are necessary in
the production process before a further production
stage;
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 continued
(c) administrative overheads that do not contribute to

bringing inventories to their present location and

condition; and
(d) selling costs.

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 Cost formulas
 Specific Identification
 FIFO
 Weighted Average

N.B:- Use the same cost formula for all inventories

having a similar nature and use to the entity.
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 Net realizable value
NRV = fair value less costs to sell
General Rule:- assets should not be carried in excess
its recoverable amount.
Reasons for NRV becomes lower than the cost:-
1. Damage/ obsolescence
2. Falling in selling price
3. Increase in cost of completion

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 Recognition as an expense
 When inventories are sold, the carrying amount of
those inventories shall be recognized as an expense in
the period in which the related revenue is recognized.
 The amount of any write-down of inventories to net
realizable value and all losses of inventories shall be
recognized as an expense in the period the write
down or loss occurs.

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 Disclosure
The financial statements shall disclose:-

(a) the accounting policies adopted in measuring

inventories, including the cost formula used;

(b) the total carrying amount of inventories

(c) the carrying amount of inventories carried at fair

value less costs to sell;

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 continued
(d) the amount of inventories recognized as an

expense during the period;

(e) the amount of any write-down of inventories

recognized as an expense in the period

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 Thank You

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Questions and Discussion

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