1. 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.
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2. Inventory 5-2 IAS 2 Inventory 1.Initial measurement
How to establish the cost of inventory initially?
Inventory=quality X value
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3. 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
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4. 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
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5. IAS 2 Inventory Cost formula Specific identification method FIFO
Weighted Average
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6. 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.
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7. 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
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8. 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.
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9. 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 Item B
Required
At what amount will inventories be stated in the statement of financial
position in accordance with IAS 2
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10. IAS 2 Inventory Answer Units Cost NRV Lower Total $ $ $
Item A
Item B
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11. 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, ,050
Conversion costs: 2nd stage
Finished product: , ,700
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12. 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
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13. 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
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