1. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE / Principles of Financial and Cost Accounting
Thilanka Warnakulasooriya B.Com Special (Col), ACA, MBA Fin ( Col)

2. LKAS 2 INVENTORIES

3. LKAS 2 - Objective and Scope
What costs are recognized as inventory costs and when these costs are transferred to the income statement as expense
But excludes construction work-in-progress, inventories of financial instruments, and biological inventory assets related to agricultural activity and agricultural products at the point of harvest

4. DEFINITIONS OF KEY TERMS
Inventory. An asset that is
1. Held for sale in the normal course of business
2. In the process of production for such sale
3. In the form of materials or supplies to be used in the production process or in the rendering of services

5. Net realizable value. The estimated selling price in the normal course of business less estimated cost to complete and estimated cost to make a sale.
MEASUREMENT OF INVENTORIES
Inventories are measured at the lower of cost and net realizable value (LC and NRV)

6. LC and NRV example:
Cost Rs 100
Selling price Rs 90
Cost to complete Rs 5
Cost to sell 10% of SP
Measure the stock as per LKAS 2

7. COST OF INVENTORIES The cost of inventories comprises all
1. Costs of purchase
2. Costs of conversion
3. Other cost incurred in bringing the inventories to their present location and condition

8. Costs of Purchase The costs of purchase constitute all
The purchase price
Import duties
Transportation costs
Handling costs directly pertaining to the acquisition of the goods
Trade discounts and rebates are deducted when arriving at the cost of purchase of inventory

9. Costs of Conversion of Inventory
Direct labor, indirect variable and fixed production overhead costs
Variable production overhead: allocate to inventory based on actual usage
Fixed production overhead: allocate to production based on normal operating capacity (except when abnormally high production)

10. Other Costs in Valuing Inventories
Other costs in valuing inventories include those costs that are incurred in bringing the inventories to their present location and condition
i.e costs of designing products for specific customer needs.

11. Excluded Costs from Inventory Valuation
Certain costs are not included in valuing inventory. They are recognized as expenses during the period they are incurred.
Examples of such costs are
1. Abnormal amounts of wasted materials, labor, or other production costs
2. Storage costs unless they are essential to the production process
3. Administrative overheads that do not contribute to bringing inventories to their present location and condition
4. Selling costs

12. Ex: Following information extracted from Nice Furniture Company which imports & trading furniture in Srilanka
Cost of Purchases Mn
PAL & NBT Mn
VAT Mn
Freight and insurance on purchases Mn
Other handling costs relating to imports Mn
Salaries of stores department Mn
Brokerage commission payable to indenting agents for arranging imports 3Mn
Sales commission payable to sales agents Mn
After-sales warranty costs Mn

13. TECHNIQUES FOR MEASUREMENT OF COSTS
COST FORMULAS
Assign recent costs to ending inventory
Correspond closely with the actual physical flow of the goods and services
Three permitted:
Specific identification
First-in, first-out (FIFO)
and weighted average

14. Specific identification:
For inventory items that are not ordinarily interchangeable
For goods and services produced and segregated for specific projects
FIFO and weighted average:
FIFO – The FIFO method assumes that the inventories that are purchased first are sold first, with the ending or remaining items in the inventory being valued based on prices of most recent purchases.
Weighted average – weighted average cost of all goods available for sale ends up in both ending inventory and cost of goods sold

15. Cost of ending inventory at 31 December 2013.
The information about the inventory balance at the beginning and purchases made during the year 2013 are given below:
Jan 1
Beginning balance:
per unit
7,200
April 12
Purchases:
per unit
12,000
Oct. 17
per unit
17600
Dec. 15
per unit
4,800
————
———-
Available during the year 2013
2,000 units
41,600
On 31st December 2013, 600 units are on hand according to physical count.
Required: Compute the following using first-in, first-out (FIFO) method:
Cost of ending inventory at 31 December 2013.
Cost of goods sold during the year 2013.

16. Ex 2
The following are the purchases and sales made by Global trading Ltd(as a newly set up company, has no beginning inventory):
Purchases
Jan Rs.200
April Rs. 150
September @ Rs. 175
Sales
Feb 150
December 200
Determine the value of the Inventory as at 31st December under the weighted-average cost method

17. RECOGNITION OF EXPENSE
When inventory is sold, the carrying amount of inventory should be recognized as an expense when the related revenue is recognized. Moreover, the amount of any inventory written down to net realizable value is recognized as an expense.

18. DISCLOSURE
Accounting policies adopted for measuring inventories and the cost flow assumption (i.e., cost formula) used
Total carrying amount as well as amounts classified as appropriate to the entity
Carrying amount of any inventories carried at fair value less costs to sell
Amount of inventory recognized as expense during the period
Amount of any write-down of inventories recognized as an expense in the period
Amount of any reversal of a write-down to net realizable value and the circumstances that led to such reversal
Circumstances requiring a reversal of the write-down
Carrying amount of inventories pledged as security for liabilities