2 IAS 2 does not apply toWork in progress arising under construction contracts including directly related service contractsFinancial instrumentsBiological assets relating to agricultural activity and agricultural product at the point of harvestProducers of agricultural and forest products, minerals and mining products etcCommodity broker – traders that measure their inventories at fair value less selling costsThese are all covered under specific standards.
3 Definition of Inventory Held for sale in the ordinary course of businessIn 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.
4 Valuation of Inventory Physical Inventory Count at end of year – guarantees correct quantitiesImpacts on profits and tax liability in the Statement of Profit & LossStrengthens the position of the Statement of Financial Position
5 The larger the closing inventory the smaller the cost of sales, the larger the gross profit Trading A/CTrading10,000Less cost of salesOpening inventory2,000Purchases1,5003,500Less Closing inventory1,200Cost of Sales2,300GROSS PROFIT7,700If a company could manipulate the value of closing inventory, it could influence profit figures and tax liabilitiesDifferent 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 etcIAS 2 was introduced to provide clarity
6 Fundamental Principle Inventory valued at the lower of Cost or NRVPrudence – not to overstate/understate the assets
7 Definition of NRVNET 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.
8 NRV greater than Cost but… NRV may be lower if…DamagedObsoleteChange in market demandPhysical deterioration
9 Calculate NRV Sale Price further costs that may be incurred to complete the production of the itemcosts to sell and distribute the item
10 Calculating CostCosts 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
11 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 overheadsMarketing and other sales costs.
12 Measurement Actual unit cost FIFO Weighted average costs Standard cost Retail method
13 Measurement Actual unit cost FIFO Weighted average costs Standard cost Retail methodActual Unit CostCost of each item valued individually by including all costs incurred to bring it to its present location and condition. Usually only feasible for high-valued, low-quantity inventory eg Car dealership
14 Measurement Actual unit cost FIFO Weighted average costs Standard cost Retail methodFirst In First OutInventory is made up of the latest purchases.LIFO method banned.
15 Measurement Actual unit cost FIFO Weighted average costs Standard cost Retail methodWeighted AverageWeighted average purchase price over the year used to value closing inventory
16 Measurement Actual unit cost FIFO Weighted average costs Standard cost Retail methodStandard CostStandard costs reviewed frequently to ensure that they bear a reasonable relationship to actual costs during the period
17 Measurement Actual unit cost FIFO Weighted average costs Standard cost Retail methodRetail MethodUsed in retail for measuring large quantity of inventory with similar margins that are rapidly changing. Cost determined by using a reduced sale value.
18 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
19 Reversal of Write Down Increase in NRV - Expense “Reversal of Write Down”
20 DisclosureThe 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.
21 Q1Inventories should be valued at the lower of Cost or NRV
22 Q2Stock cost 60,000NRV 40,00040,000 x 2.5% = 1,000Write down = 20, ,000 = 21,000JournalDrCrInventory Write Down Expense A/C (P&L)21,000Inventory A/C (SFP)Being the write down of slow moving stock
23 Q3The following costs cannot be included as part of the cost of inventory:Selling costs
24 Q4 Journal Dr Cr Receivables 55,000 Sales 50,000 VAT 5,000 Being the sale of goods on credit not accounted for+ receivables 55,000+ sales 50,000+ VAT 5,000+ Expense 45,000- CA inventory 45,000JournalDrCrInventory Expense (P&L)45,000Inventory (SFP)Being the correction of overestimation of closing stock
25 Q5 Write down 300,000 300,000 x 50% = 150,000 Insurance receivable CA Recoverable valueJournalDrCrInventory expenses (P&L)300,000Inventory (SFP)Being the write down of stock destroyed in fireJournalDrCrInsurance Compensation Receivable (SFP)150,000Compensation receivable (SPL)Being the compensation for stock destroyed in fire
26 Q6 Journal Dr Cr Receivables 14,000 Sales Being the sale of goods on credit not accounted for+ receivables 50 x 280+ sales 50 x 280700 x 280 = 196,000750 x 300 = 225,000Adjustment 29,000+ expense- CA inventoryJournalDrCrInventory expense (P&L)29,000Inventory (SFP)Being the write down of inventory to NRV
27 Q7 NRV P Q Selling Price 150 295 Sales & Marketing (15) (18) Delivery to customer(21)(40)114237CostPQPurchase Cost100200Delivery from Supplier2030Import Duty1.202.60COST121.20232.60
29 Q10IAS 2 states that inventory be measured as the lower of cost or Net Realisable ValueCost = cost of purchase and cost of conversionNRV = actual or estimated selling price less and further costs of conversion
30 CostNRVMaterials15,000Selling Price250Labour20,000Less Marketing Costs25Depreciation10,0001 table225Factory Rates5,00050 x 22511,250Factory ExpensesOther production Expenses500 tables6,50013050 x 130