INVENTORY VALUATION – IAS 2

C MBAHIJONA

24 August 2022 Fundamentals of Accounting - AFE3582 C Mbahijona 1

 LEARNING OUTCOME

• Measure inventory;
• Estimate the value of inventory;
• Disclose inventory in financial statements.

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 INTRODUCTION – INVENTORY

• Inventory include all assets, both tangible and intangible:

Held for sale in the ordinary course of business e.g fuel
at a petrol station and sweets sold by cafe;
In the process of production e.g partly completed
furniture for furniture manufacturer;
Consumed during the production of saleable goods or
services e.g shampoo used in hair salon
Including cost of labour and other expenses e.g
supervision and other overheads.

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 MEASUREMENT OF INVENTORIES

• Inventory are measured at the lower of cost and net

realisable value.
» Determine the cost of inventories
» Applying a cost allocation technique to measure the
cost of inventories
» Determine the net realisable value
» Recording the inventories at the lower of cost and
net realisable value in the financial statements.

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 COST OF INVENTORIES

• The cost of inventories includes:

» Purchasing costs
» Conversion costs
» Other costs incurred in bringing inventories to their
present location and condition
• The cost of inventories exclude
» abnormal spillage of raw material and labour
» Administrative expenses
» Selling expenses
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 COST OF INVENTORIES

• Purchasing costs include:

» The purchase price of finished goods or raw material
» Import duties and other taxes, other those recoverable
from taxing authorities e.g VAT for VAT vendor
» Transport cost, handling costs and other cost relating
to purchasing of inventories
• From these costs, the following is deducted:
» Trade discounts, rebates and other similar items such
as subsidies on purchases.
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 COST OF INVENTORIES - EXAMPLE

Entity A is registered for VAT.

• Entity A, purchased goods for N$ 703 703.70 (including
VAT 14%) before rebates or discount.
• Entity A will receive a 10% volume rebate on the purchase
price of the goods
• Entity A will receive a further 10% settlement discount if
the amount is settled within 30days. Entity A have
intention is settling the amount in 30 days.
• Calculate the amount to be recognised as the cost of
inventories?
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 CONVERSION COSTS

• These are costs incurred in converting raw material

into finished products ready for sale:
» Direct labour
» Variable production overheads costs
» Fixed production overhead costs based on normal
capacity.

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 OTHER COSTS

• Included in these costs are all other costs incurred

in bringing the inventories to the current location
and condition. Examples:
• Costs of designing products for a particular
customer
• Borrowing costs relating to inventories
• Storage costs in the production process

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 COST FORMULAE TO VALUE INVENTORY

• Various techniques can be used to calculate the

cost of inventories:
Standard cost method – predetermined standards
are used to determine the cost of inventory
Retail method – the gross profit percentage is used
to deduce the cost of the inventory from the selling,
its suitable for entities who does not keep complete
records.

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 METHODS USED TO VALUE INVENTORY

• First-In-First-Out – FIFO
It is assume that the items which were purchased
first are sold first. This does not refer to the physical
flow of goods, but it is used to value inventory on
hand at the latest prices. Example:
Entity purchased 10 units @ N$ 5, further purchased
7 units @ N$ 6.50 and sold 12 units @ N$15.00,
calculate the cost of closing inventories?

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 METHODS USED TO VALUE INVENTORY

• Last In First Out - LIFO

As each issue of goods is made they are assume to be from
the last lot of goods received before date of issue. Where there
is not enough left of the last lot of goods, then the balance of
goods needed is said to come from previous lot still unsold.
Entity purchased 100 units @ N$ 16 and purchased further
300 units @ N$ 16.50. Sold 250 units, selling price N$ 20.
Calculate closing stock.

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 METHODS USED TO VALUE INVENTORY

• Weighted Average Method

The total cost of the goods available for sale is divided by
the number of units in order to determine an average cost
per unit. Example:
Entity purchased 100 units @ N$ 16 and purchased further
300 units @ N$ 16.50. Sold 250 units, selling price N$ 20.
Calculate the weighted average price and closing stock.

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 NET REALISABLE VALUE (NRV)

Inventory is measured at lower of cost and net realisable

value. The cost of inventory comprises all costs of
purchase, costs of conversion and other costs incurred
in bringing the inventory to its present location and
condition. If there is a possibility that inventory will not
realised at its selling price i.e the selling price of the
inventory has declined, inventory is damaged or
partially or totally obsolete. The inventory will be
reflected at NRV in the normal course of business less
estimated cost required to achieve the sale.

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 DISCLOSURE OF INVENTORY

After the cost of the inventory has been determined

in accordance with the chosen cost formula, the NRV
principle is applied. The amount at which inventory
is valued for financial statement purposes is then
known.

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 EXAMPLE – INVENTORY DATA
Date Purchased Purchased Unit Sales Unit Price
January 19x5 10 30.00
April 19x5 10 34.00
May 19x5 8
October 19x5 20 40
November 19x5 24

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