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IAS 2 Inventory

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1 IAS 2 Inventory

2 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.

3 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.

4 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

5 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

6 Fundamental Principle
Inventory valued at the lower of Cost or NRV Prudence – not to overstate/understate the assets

7 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.

8 NRV greater than Cost but…
NRV may be lower if… Damaged Obsolete Change in market demand Physical deterioration

9 Calculate NRV Sale Price
further costs that may be incurred to complete the production of the item costs to sell and distribute the item

10 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

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 overheads Marketing 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 method Actual Unit Cost Cost 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 method First In First Out Inventory is made up of the latest purchases. LIFO method banned.

15 Measurement Actual unit cost FIFO Weighted average costs Standard cost
Retail method Weighted Average Weighted average purchase price over the year used to value closing inventory

16 Measurement Actual unit cost FIFO Weighted average costs Standard cost
Retail method Standard Cost Standard 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 method Retail Method Used 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 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.

21 Q1 Inventories should be valued at the lower of Cost or NRV

22 Q2 Stock cost 60,000 NRV 40,000 40,000 x 2.5% = 1,000 Write down = 20, ,000 = 21,000 Journal Dr Cr Inventory Write Down Expense A/C (P&L) 21,000 Inventory A/C (SFP) Being the write down of slow moving stock

23 Q3 The 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 45,000 Journal Dr Cr Inventory Expense (P&L) 45,000 Inventory (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 value Journal Dr Cr Inventory expenses (P&L) 300,000 Inventory (SFP) Being the write down of stock destroyed in fire Journal Dr Cr Insurance Compensation Receivable (SFP) 150,000 Compensation 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 280 700 x 280 = 196,000 750 x 300 = 225,000 Adjustment 29,000 + expense - CA inventory Journal Dr Cr Inventory expense (P&L) 29,000 Inventory (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) 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

28 Q9 Week Qty € Balance Open 140 10 1,400 Week 1 Bought 13 1,820 3,220
Used -195 140 x 10 1400 55 x 13 715 2115 1105 Week 3 80 11 880 1985 Week 4 -100 85 x 13 15 x 11 165 1270 65 AVCO (140 * 10) + (140 * 13) 11.50 11.50 * 195 (140 * 10) + (140 * 13) + (80*11) 280 360 (85*11.50) + (80*11) 11.61 11.61 * 100 4100/360 = 11.39 160 65 * =

29 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

30 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 Other production Expenses 500 tables 6,500 130 50 x 130

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