inventory ias

GROUP MEMBERS SAQLAIN ILYAS HASHIM YASIN

SAAD ASLAM MUHAMMAD DILSHAD

GHULAM ABBASRIZWAN RIAZ

InventoriesInternational Accounting Standards

Definition

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale.

Types of Inventory1. Raw materials2. Work in process3. Finished goods4. Goods for resale 5. Stocks in transit6. Consignment stocks

Raw materials:- Materials and components scheduled for

use in making a product.

Work in process:-Materials and components that have

begun their transformation to finished goods.

Finished goods:- Goods ready for sale to customers.

Goods for resale :- Returned goods that are salable.

Stocks in transit:- The stock in transit is the quantity of a

material that was withdrawn from the stock of the issuing plant but has not yet arrived at the receiving plant.

Consignment stocks:-The goods which are stored at one

location, such as a business or a warehouse, but are legally owned by a different company such as a supplier or manufacturer.

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Hashim Yasin

CharacteristicsThese are the characteristics of inventory. All these stock reasons can apply to any owner or product

1. Time2. Economies of scale3. Uncertainty4. Seasonal Demand

Time

The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this lead time. However,

in practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself can be addressed by ordering that many days in

advance.

Economies of scale

Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and

storing brings in economies of scale, thus inventory.

Seasonal Demand

Demands varies periodically, but producers capacity is fixed. This can lead to stock accumulation, consider for

example how goods consumed only in holidays can lead to accumulation of large stocks on the anticipation of future

consumption.

Uncertainty

Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.

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Saad Aslam

Examples

While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers , service-providers

and not-for-profits - also have inventories (fixtures, furniture, supplies, etc.) that they do not intend to sell.

Manufacturers‘ , distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers.

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Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible

to control them.While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into:

Scope

The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting,

inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment,

returns and defective goods, and demand forecasting. Balancing these competing requirements leads to optimal

inventory levels, which is an ongoing process as the business needs shift and react to the wider environment.

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Ghulam Abbas

Accounting Treatment

There are a number of inventory journal entries that can be used to document inventory transactions. In a modern,

computerized inventory tracking system, the system generates most of these transactions for you, so the precise nature of the

journal entries are not necessarily visible. Nonetheless, you may find a need for some of the following entries from time

to time, to be created as manual journal entries in the accounting system.

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This is the initial inventory purchase, which is routed through the accounts payable system. The

debit will be to either the raw materials inventory or the merchandise account, depending on the nature of

the goods purchased. The entry is:

Inventory Purchase

Debit Credit

Raw materials inventory xxx

Merchandise inventory xxx

Accounts payable xxx

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Record Indirect Production Costs in Overhead

There are other types of production-related expenses that are allocated to inventory, such as rent, utilities, and supplies for the manufacturing operation. These expenditures typically begin as accounts payable and are allocated to an overhead cost pool, from which they are then allocated to inventory and the cost of goods sold. The allocation to a cost pool may occur later, but we will assume it occurs at the time of initial accounts payable recordation, with this entry:

Debit Credit

Overhead cost poolxxx

Accounts payable

xxx

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Record Production Labor in Overhead

Various types of production labor, such as production management salaries and materials management wages, are also routed through an overhead cost pool, from which they are later allocated to inventory. The entry for this is usually a shifting of the wages expense into a cost pool, with this entry:

Debit Credit


Wages expense

xxx

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Move Raw Materials to Work in Process

If you are operating a production facility, then the warehouse staff will pick raw materials from stock and shift it to the production floor, possibly by job number. This calls for

another journal entry to officially shift the goods into the work-in-process account, which is shown below. If the

production process is short, it may be easier to shift the cost of raw materials straight into the finished goods account, rather

than the work-in-process account.

Debit Credit

Work-in-process inventoryxxx

Raw materials inventory

xxx

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Record Inventory Scrap and Spoilage

There will inevitably be a certain amount of scrap and spoilage arising from a production process, which is

normally recorded in the overhead cost pool and then allocated to inventory. If these amounts are abnormal, then you would instead charge the abnormal amount to the cost of goods sold (so that they are not carried as an asset). The

entry for the former situation is:

Debit Credit


Work-in-process inventory

xxx

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Muhammad Dilshad

Record Finished Goods

Once the production facility has converted the work-in-process into completed goods, you then shift the cost of these materials into the finished goods account with the

following entry:

Debit Credit

Finished goods inventoryxxx


xxx

Allocate Overhead

At the end of each reporting period, allocate the full amount of costs in the overhead cost pool to work-in-process inventory, finished goods inventory, and the cost of goods sold, usually

based on their relative proportions of cost or some other readily supportable measurement. The journal entry is:

Debit Credit

Work-in-process inventoryxxx

Finished goods inventory

xxx

Cost of goods sold

xxx

Overhead cost pool

xxx

Sale Transaction Entry

Once there is a sale of goods from finished goods, charge the cost of the finished goods sold to the cost of goods sold

expense account, thereby transferring the cost of the inventory from the balance sheet (where it was an asset) to the income statement (where it is an expense). The entry is:

Debit Credit

Cost of goods sold expensexxx

Finished goods inventory

xxx

Obsolete Inventory Entry

There is likely to be some amount of obsolete inventory arising on an ongoing basis, so it is best to continually charge a small amount to the cost of goods sold and set up a reserve

account for obsolete inventory, using the following entry:

DebiT Credit

Cost of goods sold expense

xxx

Obsolescence reserve

xxx

Lower of Cost or Market Entry

You have to periodically test inventory to see if the market cost of any inventory item is lower than its cost under

the lower of cost or market rule. As a result, you may need to reduce the carrying amount of the inventory item to its

market value, and charge the loss on inventory valuation expense for the decrease in recorded cost of the inventory.

The associated entry is:

Debit Credit

Loss on inventory valuationxxx

Raw materials inventory

xxx


xxx

Finished goods inventory xxx

An interesting point about inventory journal entries is that they are rarely intended to be reversing entries (that is, which

automatically reverse themselves in the next accounting period). Instead, the entries are usually one-time events.Additional entries may be needed besides the ones noted

here, depending upon the nature of a company's production system and the goods being produced and sold.

Inventories- International Accounting Standards…..

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Thank YouFor your attention

inventory ias

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