Ias 2 Inventories 1-Scope This Standard applies to all inventories other than Work in progress under construction contracts and directly related service contracts Financial instruments Biological assets related to agricultural activity and agricultural produce at the point of harvest The main issue with respect to accounting for inventory is the amount of cost to be recognized as an asset. 2-Key Terms Inventory. An asset (a) Held for sale in the normal course of business; (b) In the process of production for such sale; or (c) In the form of materials or supplies to be used in the production process or in rendering of services. 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. Fair value. The amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties.

Ias 2 Inventories 3-Accounting of Inventories inventories are valued at the “lower of cost and net realizable value. 4- COST OF INVENTORIES 1-The cost of inventories comprises all (a) Costs of purchase (b) Costs of conversion (c) “Other costs” incurred in bringing the inventories to their present location 2- The costs of purchase constitute all of 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.

Ias 2 Inventories 3- Costs of Conversion of Inventory, include variable and fixed manufacturing overhead incurred in converting raw material into finished goods. The allocation of overhead to the cost of conversion is based on the “normal capacity” of the facility. Normal capacity is the production that is normally achieved on average over a number of periods, taking into account the loss of capacity that may result. Other costs in valuing inventories include those costs that are incurred in bringing the inventories to their present location and condition. An example of such “other costs” is costs of designing products for specific customer needs. 4- Costs that are Excluded from Inventory Valuation (a) Abnormal amounts of wasted materials, labor, or other production costs (b) Storage costs unless they are essential to the production process (c) Administrative overheads that do not contribute to bringing inventories to their present location and condition (d) Selling costs

Ias 2 Inventories 5-Critical Note : Inventory Purchased on Deferred Settlement Terms When inventories are purchased on deferred settlement terms, such arrangements contain a financing element. The difference between the purchase price for normal credit terms and the amount paid, is recognized as interest expense over the period of the financing arrangement.

Ias 2 Inventories Example of a consignment arrangement X Company ships a consignment of usb drivers to a retail outlet of the Carty Inc. X Company’s cost of the consigned goods is 2000 TL DR CR 152 Inventories Consignment out inventory Inventories Finished goods inventory 2,000 The sailers company ships the USB drivers inventory from X Company to Carty Inc. Upon receipt of an invoice for this VAT (18%) shipping expense, X Company records the following entry: DR CR 152 Inventories Consignment out inventory Deductable V.A.T Accounts payable 295 Carty Inc. sells quarter of the consigned inventory during the month for TL in credit card payments, and earns a 10% commission on these sales, totaling 100 TL According to the consignment arrangement, X Company must also reimburse Consumer Products for the 2% credit card processing fee, which is 20 TL (1000× 2%).

Ias 2 Inventories The results of this sale are summarized as follows: Sales price to Carty’s customers on behalf of X Company TL Less: Amounts due to Consumer Product in accordance with arrangement 10% sales commission 100 TL Reimbursement for credit card processing fee 20 TL Due to X Company 880 TL Upon receipt of the monthly sales report from Consumer Products, X Company records the following entries: DR CR 120 Accounts receivable Cost of goods sold Commission expense Sales Calculated VAT 180 To record the sale made by CaRty Inc. acting as agent of X Company, the commission earned by Carty Inc. and the credit card fee reimbursement earned by Carty Inc. in connection with the sale. DR CR 620 Cost of goods sold Consignment out inventory To transfer the related inventory cost to cost of goods sold, including half the original nventory cost and half the cost of the shipment to Consumer Product [( =2,250) × 1/4 = 562.5

Ias 2 Inventories Example of Expenses Relating Inventories Ay A.Ş purchases chocalates from various countries and exports them to Europe. Ay A.Ş has incurred these expenses during 2010: (a) Cost of purchases (based on vendors’ invoices) (b) Trade discounts on purchases (c) Import duties (d) Freight and insurance on purchases (e) Other handling costs relating to imports (f) Salaries of accounting department (g) Brokerage commission payable to indenting agents for arranging imports (h) Sales commission payable to sales agents (i) After-sales warranty costs Which constitute the cost of inventories of Ay A.Ş ? A, B, C,D E, G Net Realizable Value Inventories are written down to net realizable value (NRV) on the basis that assets should not be carried in excess of amounts likely to be realized from their sale or use. Write-down of inventories becomes necessary for several reasons; 1- inventories may be damaged 2- become obsolete 3- their selling prices may have declined after year-end (or period-end). Inventories are usually written down to their NRV on an item-by-item basis.