9. Inventory and IAS 2: Valuation of Inventory Flashcards
When is inventory accounted for?
At the end of the period by the accountant when preparing the financial statements.
Entries are not made to inventory in day-to-day bookkeeping.
What is step 1 when accounting for inventory?
Remove the opening inventory
- Debit Statement of Profit or Loss account
- Credit Inventory account
What is step 2 when accounting for inventory?
Create the closing inventory.
- Debit Inventory account
- Credit Statement of Profit or Loss account
What is the basic rule for valuation of inventory?
It should be valued at the lower of cost and net realizable value.
What is cost in the context of valuation of inventory?
The cost of getting the goods to the state that they are in.
What is net realizable value?
Selling price less any costs involved in getting the goods in a state to be sold.
What are the 4 approaches to valuation of inventory?
- Unit Cost
- FIFO (first in, first out)
- Average cost
- Selling price less estimated profit margin
What is the unit cost policy of valuation?
We can establish the cost of each item individually.
What is the FIFO policy of valuation?
The oldest items in inventory are sold first.
What is the average cost policy of valuation?
After a sale, each item in inventory is valued at the average cost of inventory prior to the sale.
What is the first provision of IAS 2: Inventories?
Inventories should always be valued at the lower of cost and net realizable value.
What is the second provision of IAS 2: Inventories?
The cost of Inventories should include all costs of purchase, costs of conversion and other costs in bringing the inventories to their locations and condition.
What expenses are excluded from the second provision of IAS 2: Inventories?
The following overhead expenses:
- Selling costs
- Storage costs
- Abnormal wastage
- Administrative costs
What is the third provision of IAS 2: Inventories?
When measuring costs:
- Unit costs should be used if costs can be specifically identified.
- If this is not possible, then use FIFO or average cost.
What is the fourth provision of IAS 2: Inventories?
Disclosure requirements:
- Accountancy policy for valuation.
- Inventory total, analysed appropriately
- Amount of inventories valued at net realizable value.
