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Inventories http://www.cc.cec/budg/.

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Presentation on theme: "Inventories http://www.cc.cec/budg/."— Presentation transcript:

1 Inventories

2 Overview of session 1. Scope of application and key concepts
2. Recognition and measurement 3. Disclosures 4. E.C. specific implications 5. Questions

3 1. Scope of application and key concepts
Inventories 1. Scope of application and key concepts

4 Definition Inventories are assets:
held for sale in the ordinary course of business; or in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services

5 Inventories Inventories include:
goods: commodities purchased and held for resale supplies: raw materials products: intermediate products, finished goods Raw Materials Work in Progress Finished Goods

6 Out of scope Not held for sale of for use in the production cycle:
Office supplies expensed Fixed assets durable use for own activities E.g. Most spare parts and servicing equipment are usually carried as inventory and recognised as an expense as consumed. However, major spare parts and stand-by equipment qualify as property, plant and equipment when the enterprise expects to use them during more than one period or if they can be used only in connection with an item of property, plant and equipment and their use is expected to be irregular.

7 IPSAS 12 Covers all inventories other than:
WIP under construction contracts Financial instruments Agricultural and forest products, mineral ores and biological assets

8 2. Recognition and measurement
Inventories 2. Recognition and measurement

9 Inventories – Initial recognition
Initial recognition shall normally take place at the date of acquisition or date of entry shall correspond to the date on which the ownership of the inventories is transferred to the E.C., which generally corresponds to when delivery of the goods is accepted. For simplification purposes this may during the year be when the invoice is received Cut-off and reporting at year-end: If booking based on invoice, regularise any discrepancies between invoicing and delivery/transfer of ownership Investigate specific contractual provisions determining title (e.g. FOB terms: shipping or destination) Consignment inventories (held by custodians)

10 Costs to be included Cost of Other Purchase Costs Conversion
All costs contributing to bring inventories to their present location and condition Cost of Purchase Other Costs Conversion includes: rebates tax (customs/VAT) transport handling costs attributable to the acquisition Any other costs that are incurred in bringing the inventories to their present location and condition Fixed & variable production overheads Direct costs, e.g. direct labour

11 Costs to be excluded Abnormal amounts of wasted materials, labour or other production costs Storage costs Unless those costs are necessary in the production process prior to a further production stage Administrative overheads that do not contribute to bringing inventories to their present location and condition Selling costs

12 Cost Formulas Specific identification: Global methods
for items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects Global methods First in First Out (FIFO) formula: assumes that the items of inventory that were purchased or produced first are sold first Weighted Average Cost (WAC) formula: the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period Consistency required across each type of inventory FIFO better reflects changes in prices.

13 Worked example – Inventory costing
Inventory: + during year N Inventory: - during year n Date Q and (P) Cost Q Amount Beginning inventory 100 units (320) 32,000 March 1 250 units (341) 85,250 April 1 (230) ? July 1 200 units (343) 68,600 September 1 (120) October 1 100 units (346) 34,600 November 1 (100) December 1 50 units (347) 17,350 Total in 600 units 205,800 Total 700 units 237,800 (450) Closing inventory: 250 units

14 Inventory costing - FIFO
Inventory: + during year N Inventory: - during year n Date Q and (P) Cost Q Amount Beginning inventory 100 units (320) 32,000 March 1 250 units (341) 85,250 April 1 (230) 100*(320)+130*(341) July 1 200 units (343) 68,600 September 1 (120) 120*(341) October 1 100 units (346) 34,600 November 1 (100) 100*(343) December 1 50 units (347) 17,350 Total in 600 units 205,800 Total 700 units 237,800 (450) 151,550 Closing inventory: 250 units = 86,250

15 Inventory costing - WAC
Date Movements Inventories Q Cost/unit Value January 1 100 320 32,000 March 1 250 341 85,250 350 335 = 117,250/350 117,250 April 1 (230) 335 (77,050) 120 40,200 July 1 200 343 68,600 340 = 108,800/320 108,800 September 1 (120) 340 (40,800) 68,000 October 1 346 34,600 300 342 = 102,600/300 102,600 November 1 (100) 342 (34,200) 68,400 December 1 50 347 17,350 343 = 85,750/250 85,750 Total out: 450 units 152,050 Closing inventory:

16 What are the Dr and Cr involved in a purchase of inventory?
The debits and credits Inventory is a current asset Inventory is expensed… …when the related revenue is recognised What are the Dr and Cr involved in a purchase of inventory?

17 Two methods of accounting
Stock ledgers – each movement in or out is accounted for individually; the level of inventories is known at each precise moment in time Periodic stock counts – inventories get adjusted based on periodic counts of physical inventory

18 Stock ledgers Using the FIFO method # ins #
Using the FIFO method # ins # Dt : 6# Purchases of goods (economic outturn account) : Ct : 4# Suppliers Dt : 3# Inventories (balance sheet) Ct : 6# Movement in inventories (economic outturn account) # payment of suppliers # Dt : 4 Suppliers Ct : 5# Cash # outs # Dt : 6# Movement in inventories (economic outturn account) Ct : 3# Inventories (balance sheet)

19 Periodic stock counts Throughout the year : # ins #
Dt : 6# Purchase of goods (economic outturn account) : Ct : 4# Suppliers # payment of suppliers # Dt : 4# Suppliers Ct : 5# Cash At year end : # reversal of beginning balance # Dt : 6# Movement in inventories (economic outturn account) Ct : 3# Inventories (balance sheet) # recording of final balance # Dt : 3# Inventories (balance sheet) Ct : 6# Movement in inventories (economic outturn account)

20 Inventories – Subsequent measurement
Measure inventories at lower of: Cost and Net Realisable Value Cost may not be recoverable when: damaged obsolete increased costs of completion selling price is reduced

21 Net Realisable Value Net Realisable Value The estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale Selling price X Trade discounts (X) Costs to completion (X) Marketing, selling and distribution costs (X) Net realisable value X Use replacement cost when the economic benefits Or service potential cannot be acquired in the market

22 Inventories 3. Disclosures

23 Key disclosures Accounting policies (including cost formula used)
Balance sheet Carrying amount of inventories (on face of BS) Analyse inventories by classification (e.g. raw materials, finished goods etc…) Economic outturn account Cost of inventories expensed in period Other

24 4. E.C. specific implications
Inventories 4. E.C. specific implications

25 Current accounting V. IPSAS
Compliance issue Current accounting policy Revised accounting policy Nature and definition of inventory items Held for sale or for internal use Differentiate between inventories, fixed assets and expenses Office supplies Other consumables Material for building maintenance Scientific material Publications Inventories Expenses EAGGF inventories Do not belong to the E.C. Pricing at year end Latest purchase price, except: Publications (1/3 of sales price) Fissile matters (cost of acquisition) FIFO NRV: Goods for sale Goods to be distributed for free Lower of cost or market Lower of cost or NRV Lower of cost or replacement cost

26 Inventories 5. Questions


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