2. AFTER STUDYING THIS STANDARD YOU
SHOULD BE ABLE TO
UNDERSTAND THE OBJECT OF
INVENTORY.
SCOPE OF INVENTORY
DEFINITION
MEASUREMENTS
COST OF INVENTORY
COST FORMULAS
NET REALIZABLE VALUE (NRV)
RECOGNITION AS AN EXPENSE
DISCLOSURE
3. Objective of IAS 2:
The objective of this stander is to
prescribe the accounting treatment
for inventories.
4. Scope of IAS 2
Applies to all inventories except:
Work in progress on construction and service
contracts (IAS 11)
Financial instruments (IAS 32 and IFRS 9)
Biological assets arising from agricultural activity
(IAS 41)
5. Definitions
Inventories are assets:
Held for sale in the ordinary course of
business(Finished goods)
In the process of production for such sale (work in
process or
In the form of materials or supplies to be consumed
in the production process or in the rendering of
services.(Raw material)
6. Cost Of Inventory
Purchase
Costs of conversion
Other costs incurred in bringing the inventories to
their present location and condition
Cost of inventories of a service provider
7. 1) Cost of purchase
It Includes:
Purchase price plus
Import duties and other taxes plus
Transport, handling and any other cost directly
attributable to the acquisition of finished goods,
Services and materials less
Trade discounts, rebates and other similar
amounts.
8. 2)Costs of conversion
Costs of conversion of inventories consist of two main
parts.
Costs directly related to the units of production, e.g.
direct materials, direct labor
Fixed and variable production overheads that are
incurred in converting materials into finished
goods, allocated on a systematic basis
9. 3)Other Cost
Any other costs should only be recognized if they are incurred in
bringing the inventories to their present location and condition.
The standard lists types of cost which would not be included in
cost of inventories. Instead, they should be recognized as an
expense in the period they are incurred.
Abnormal amounts of wasted materials, labor or other
production costs
Storage costs (except costs which are necessary in the
production process before a further production stage)
Administrative overheads not incurred to bring inventories to
their present location and conditions
Selling costs
10. 4)Cost of inventories of a service
provider
To the extent that service providers have inventories, they
measure them at the costs of their production. These
costs consist primarily of the labor and other costs of
personnel directly engaged in providing the service,
including supervisory personnel, and attributable
overheads. Labor and other costs relating to sales and
general administrative personnel are not included but
are recognized as expenses in the period in which they
are incurred. The cost of inventories of a service
provider does not include profit margins or non-
attributable overheads that are often factored into
prices charged by service providers.
11. Measurement of inventory
Inventories shall be stated at the lower of cost and net realizable
value.
To the extent that service providers have inventories, they measure
them at the costs of their production. These costs are primarily the
costs of labor directly engaged in providing the service, including
supervisory personnel, and attributable overheads.
The cost of inventories of items that are ordinarily interchangeable
and have not been produced and segregated for specific projects is
determined by using the first-in, first-out (FIFO) or weighted
average cost formula. The same cost formula shall be adopted for
all inventories having a similar nature and use to the entity.
12. Inventory is valued at Cost & NRV whichever is
less.
NRV= Estimated selling price xxx
Less: Estd. Cost of completion. (xxx)
Less: Selling cost (xxx)
NRV (xxx)
13. Example
Cost of partial finished unit at the end of 2009-2010 is
Rs.150. The unit can be finished next year by a future
expenditure of Rs.100. The finished unit can be sold at
Rs 250. subject to payment of 4% brokerage on selling
price. Calculate value of inventory.
14. Recognition as an expense
The following treatment is required when inventories are
sold.
The carrying amount is recognized as an expense in the
period in which the related revenue is Recognized
The amount of any write-down of inventories to NRV
and all losses of inventories are recognized as an
expense in the period the write-down or loss occurs
The amount of any reversal of any write-down of
inventories, arising from an increase in NRV, is
recognized as a reduction in the amount of inventories
recognized as an expense in the period in which the
reversal occurs
15. Disclosure
Required disclosures:
Accounting policy used
Carrying amount of any inventories
Net realizable value
Carrying amount of inventories pledged as security for
liabilities
Cost of inventories recognized as expense (cost of goods
sold).
16. Example Questions
Question
Al – Fateh departmental store sells goods on 30%
profit. At the end of the year, store owns goods the
selling price of which is Rs. 10,000.000. You are
required to calculate the value of inventory.
Value of inventory = 10,000,000 * 30%
= 3,000,000
=10,000,000-3,000,000
Value of inventory=7,000,000
17.
18. Question
In each of the two questions given below, find the value of the
inventory at the end of the period and the cost of sales.
(a) A company is selling one model of car. It has no inventory at the
start of the period. The company buys 4 cars during the period.
Due to price rises, the cars cost: $12000, $13000, $14000,
$15000 in the order they are purchased. The company then sells
2 cars, and uses FIFO to value the inventory. What is the value of
the inventory at the end of the period and the cost of sales?
(b) Another company is selling one model of car. It also has no
inventory at the start of the period. This company also buys 4 cars
during the period. Due to price rises, the cars cost it: $12000,
$13000, $14000, $15000 in the order that it purchased them.
Total cost=$54000. The company sells 2 cars, and uses the
weighted-average cost to value its inventory. What would be the
value of its inventory and cost of sales?
19. (a) The value of the inventory at the end of the period
is $29000 = ($14000+$15000). The cost of sales is
$25000 = ($12000+$13000).
(b) The value of your inventory at the end of the period
is $27000 = ($54000/2). Your cost of sales is
$27000 = ($54000/2).
