IAS2 Inventory 5-1 1.Definition Inventories are assets: – Held for sale in the ordinary course of business; – 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. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Inventory 5-2 IAS 2 Inventory 1.Initial measurement How to establish the cost of inventory initially? Inventory=quality X value Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Measurement IAS 2 Inventories states that 'Inventories should be measured at the lower of cost and net realisable value.' Cost of inventory includes: Cost of purchase Cost of conversion Other cost incurred in bringing the inventory to their present location and condition Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Measurement Cost excluded from the cost of inventory: Abnormal cost such as abnormal wastage of material, labor, and other cost Storage costs except those that are necessary in the production process before the further production stage Adminstrative overhead Selling cost Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Cost formula Specific identification method FIFO Weighted Average Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Net realizable value NRV is the estimated selling price in the oridinary course of business, less estimated costs of completion and estimated costs necessary to make the sale. If NRV>COST: no adjustment, keep at cost If NRV<COST: for raw material and supplies, compare NRV of finished goods with cost, if NRV of finished goods > cost, no adjustment needed, keep at cost; of NRV of finished goods< cost, write down to NRV. For both the situation, assess each year, if situation chages, reverse the write down. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Net realizable value In fact we can identify the principal situations in which NRV is likely to be less than cost, ie where there has been: a) An increase in costs or a fall in selling price b) A physical deterioration in the condition of inventory c) Obsolescence of products d) A decision as part of the company's marketing strategy to manufacture and sell products at a loss e) Errors in production or purchasing Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Net realizable value The assessment of NRV should take place at the same time as estimates are made of selling price, using the most reliable information available. Fluctuations of price or cost should be taken into account if they relate directly to events after the reporting period, which confirm conditions existing at the end of the period. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Example A company has inventory on hand at end of the reprting period as follows. Units Raw material Attributable Attributable Expected cost production selling costs selling overheads $ $ $ $ Item A 300 160 15 12 185 Item B 250 50 10 10 75 Required At what amount will inventories be stated in the statement of financial position in accordance with IAS 2 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Answer Units Cost NRV Lower Total $ $ $ Item A 300 175 173 51900 Item B 250 60 65 15000 66900 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Example: Bravado manufactures equipment for the retail industry. The inventory is currently valued at cost. There is a market for the part completed product at each stage of production. The cost Structure of the equipment is as follows. Cost per unit Selling price per unit $ $ Production process:1st stage 1,000 1,050 Conversion costs: 2nd stage 500 Finished product: 1,500 1,700 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Example: The selling costs are $10 per unit, and Bravado has 10,000units at the first stage of production and 20,000 units of the finished product at 31 May 20X9. Shortly before the year end, a competitor released a new model onto the market which caused the equipment manufactured by Bravado to become less attractive to customers. The result was a reduction in the selling price to $1,450 of the finished product and $950 for 1st stage product Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

IAS 2 Inventory Example: On 30 September 2014, Razor’s closing inventory was counted and valued at its cost of $1 million. Some items of inventory which had cost $210,000 had been damaged in a flood (on 15 September 2014) and are not expected to achieve their normal selling price which is calculated to achieve a gross profit margin of 30%. The sale of these goods will be handled by an agent who sells them at 80% of the normal selling price And charges Razor a commission of 25%. At what value will the closing inventory of Razor be reported in its statement of financial position as at 30 September 2014? A. $1 million B. $790,000 C. $180,000 D. $970,000 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.