IAS 2 Inventory

IAS 2 Inventory

http://www.cpaireland.ie/UserFiles/File/students/Articles/IAS2&11.pdf 1IAS 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 costs

These are all covered under specific standards.

http://www.iasplus.com/en/standards/standard6 2Definition of InventoryHeld 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.Valuation of InventoryPhysical 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 PositionThe larger the closing inventory the smaller the cost of sales, the larger the gross profitTrading 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 clarityFundamental PrincipleInventory valued at the lower of Cost or NRVPrudence not to overstate/understate the assetsDefinition 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.NRV greater than Cost butNRV may be lower ifDamagedObsoleteChange in market demandPhysical deteriorationCalculate NRVSale Price further costs that may be incurred to complete the production of the item costs to sell and distribute the itemCalculating 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 Excluded from CostAbnormal waste or spoilageFactory Idle timeStorage 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.MeasurementActual unit costFIFOWeighted average costsStandard costRetail methodMeasurementActual unit costFIFOWeighted average costsStandard costRetail 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 dealershipMeasurementActual unit costFIFOWeighted average costsStandard costRetail methodFirst In First OutInventory is made up of the latest purchases.LIFO method banned.MeasurementActual unit costFIFOWeighted average costsStandard costRetail methodWeighted Average Weighted average purchase price over the year used to value closing inventoryMeasurementActual unit costFIFOWeighted average costsStandard costRetail methodStandard CostStandard costs reviewed frequently to ensure that they bear a reasonable relationship to actual costs during the periodMeasurementActual unit costFIFOWeighted average costsStandard costRetail 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.Write down of inventory to NRVWhere 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 downReversal of Write DownIncrease in NRV- Expense Reversal of Write DownDisclosureThe 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 classificationsc) The carrying amount at fair value less costs to dated) The amount expended in the periode) The amount of any writedowns of inventoriesf) 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.Q1Inventories should be valued at the lower of Cost or NRVQ2Stock cost 60,000NRV 40,00040,000 x 2.5% = 1,000Write down = 20,000 + 1,000 = 21,000JournalDr

Cr Inventory Write Down Expense A/C (P&L)21,000

Inventory A/C (SFP)

21,000Being the write down of slow moving stockQ3The following costs cannot be included as part of the cost of inventory:Selling costsQ4+ receivables 55,000+ sales 50,000+ VAT 5,000

+ Expense 45,000- CA inventory 45,000

JournalDr

Cr Receivables55,000

Sales

50,000VAT5,000Being the sale of goods on credit not accounted forJournalDr

Cr Inventory Expense (P&L)45,000

Inventory (SFP)

45,000Being the correction of overestimation of closing stockQ5Write down 300,000

300,000 x 50% = 150,000 Insurance receivable CARecoverable value

JournalDr

Cr Insurance Compensation Receivable (SFP)150,000

Compensation receivable (SPL)

150,000Being the compensation for stock destroyed in fireJournalDr

Cr Inventory expenses (P&L)300,000

Inventory (SFP)

300,000Being the write down of stock destroyed in fireQ6+ receivables 50 x 280+ sales 50 x 280

700 x 280 = 196,000750 x 300 = 225,000Adjustment 29,000+ expense- CA inventoryJournalDr

Cr Receivables14,000

Sales

14,000Being the sale of goods on credit not accounted forJournalDr

Cr Inventory expense (P&L)29,000

Inventory (SFP)

29,000Being the write down of inventory to NRVQ7NRVPQSelling Price150295Sales & Marketing(15)(18)Delivery to customer(21)(40)NRV114237CostPQPurchase Cost100200Delivery from Supplier2030Import Duty1.202.60COST121.20232.60Q9WeekQtyBalanceOpen140101,400Week 1Bought140131,8203,220Week 2Used-195140 x 10140055 x 1371521151105Week 3Bought80118801985Week 4Used-10085 x 13110515 x 111651270715Balance65AVCO(140 * 10) + (140 * 13)11.5011.50 * 1952242.50(140 * 10) + (140 * 13) + (80*11)280360(85*11.50) + (80*11)11.6111.61 * 1001160.004100/360 = 11.3916065 * 11.39 = 740.27Q10IAS 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 conversionCostNRVMaterials15,000Selling Price250Labour20,000Less Marketing Costs25Depreciation10,0001 table225Factory Rates5,00050 x 22511,250Factory Expenses10,000Other production Expenses5,000500 tables6,5001 table13050 x 1306,500