5.3 Accounting for inventories

Question 1

What matters does IAS2 deal with?

Answer 1

Accounting for inventories, including determination of cost, the subsequent recognition of an expense and any write downs.

Question 2

What items make up an inventory, according to IAS2?

Answer 2

Assets:

• held for sale (finished goods)
• in production (work in progress)
• in materials and supplied (raw materials)

Question 3

Which assets are not included within the scope of IAS2?

Answer 3

• work in progress arising under construction contracts
• financial instruments
• biological assets related to agricultural activity

Question 4

What costs does the cost of inventories comprise?

Answer 4

• purchases (net of any trade discount)
• costs of conversion (manufacturing costs)
• other costs (e.g. logistical)

Question 5

What is mean by “standard costing”?

Answer 5

The practice of assigning an expected or standard cost for an actual cost and periodically analyzing variances between the expected and actual cost.

Question 6

What is the “retail method”?

Answer 6

A technique used by retailers to estimate the value of ending inventory using the cost to retail price ratio.

Question 7

What is the “Last In First Out” method (LIFO)?

Answer 7

A method for calculating inventory costs where the most recently produced or purchased items are assumed and expensed as sold first.

Question 8

What is the “weighted average cost” method?

Answer 8

A method used to account for inventory costs using the average of the cost of the goods.

Question 9

What is the First in First Out method (FIFO)?

Answer 9

A method for calculating inventory costs where the oldest produced or purchased items are assumed and expensed as sold first.

Question 10

Which method of inventory calculation is prohibited under IAS2?

Answer 10

LIFO