Ch 12 - IAS Inventories & IAS 10 Events after Flashcards
What are INVENTORIES described as:-
ASSETS
- held for sale in the ordinary course of business
- in the process of production
- materials that will be used in the production process
How are inventories measured?
THE VALUE AT LOWER OF
Cost OR Net Realisable Value
What costs should not be included in INVENTORY?
- abnormal amounts of wasted materials, labour, or other production costs;
- storage costs;
- administration costs that do not contribute to bringing the inventories to their present location and condition
- selling and distribution costs
These costs should be treated as expenses against profit in the period they arise.
What is included in COSTS OF PURCHASE when determining costs?
- purchase price
- import duties
- handling costs
- other costs directly connected with the acquisition of the goods
What is included in COSTS OF CONVERSION when determining costs?
- costs directly related to the units being produced
e.g. direct labour costs, allocation of fixed and variable overhead costs incurred in production
What is included in VARIABLE PRODUCTION OVERHEADS when determining costs?
Indirect costs of production that vary directly with the volume produced e.g. heat, light and power.
What is included in FIXED PRODUCTION OVERHEADS when determining costs?
Indirect costs of production that DO NOT vary directly with the volume produced and remain constant regardless of the number of units produced e.g. depreciation of machinery, factory administration costs.
How should the allocation of fixed production overheads be based on?
The NORMAL capacity of the business. Any excess overheads due to inefficiencies or production problems should be treated as an expense in the period that they occur.
DON’T FORGET Production overheads should be allocated on????
The NORMAL level of production. So divide overheads per units made so the cost of overheads per unit.
When should REASONABLE APPROXIMATION be used?
if the determination of an item’s actual cost is impractical e.g.
- there are a large number of items in a particular line of inventory
OR - it is impossible to identify the actual costs
What are the most common APPROXIMATIONS of inventory?
- FIFO - First in, First out
- AVCO - Average cost
Can you explain FIFO?
The closing inventory is assumed to consist of the latest purchases i.e. OLDEST inventory is sold first. THIS MEANS the closing inventory will be valued at the most recent purchase prices.
This method of cost valuation would be appropriate for inventory lines like bananas in supermarkets. They would purposely be stacked on shelves so that the older ones sell first.
Can you explain AVCO?
The weighted average cost is calculated by taking the :-
total purchase price of all the units purchased in the period
DIVIDED BY
the total number of units purchase in the period.
This would be calculated using PERIODIC or a CONTINUOUS method.
What is the TOTAL CARRYING AMOUNT of inventories?
Raw materials + Work-in-progress + Finished Goods =
What are the main DISCLOSURE requirements of IAS 2 “Inventories”?
- accounting policies adopted for inventories (including cost formula used)
- total carrying amount
- amount of inventories carried at NRV
- details of circumstances that have led to the write-down of inventories to their NRV.
What is the purpose of IAS 10 “Events after the Reporting Period”
to define to WHAT EXTENT EVENTS that occur after the reporting period SHOULD BE RECOGNISED in the financial statements.
What are the two types of events identified by IAS 10 after the reporting period?
Adjusting Events
and
Non-adjusting Events
Can you explain ADJUSTING EVENTS identified in IAS 10?
Those events which provide evidence of conditions that existed AT the reporting date.
FS should be adjusted to reflect the adjusting event.
What are some examples of Adjusting Events in IAS 10?
- Selling inventory post year-end for lower than cost price (This is evidence that inventory is incorrectly valued at the year-end)
- Evidence that a customer has gone into liquidation
- discovery of fraud or error that existed prior to the year-end
- Completion of a court case entered into before the reporting date
- Completion of an insurance claim relating to an event that occurred prior to the year-end.
Can you explain NON-ADJUSTING EVENTS identified in IAS 10?
Those that are indicative of conditions that arose AFTER the reporting date.
FS should NOT be adjusted to reflect Non-Adjusting Events
Non-adjusting events should be DISCLOSED if they affect users understanding of the FS.
What are some examples of Non-Adjusting Events in IAS 10 whish shows conditions that have arisen since the reporting date?
- Acquisition or disposal of a subsidiary after the year-end
- Announcements of a plan to discontinue an operation
- Destruction of an asset by a fire or flood after the reporting date
- Announcements of a plan to restructure
- Share capital transactions after the reporting date
- Changes in taxation or exchange rates after the reporting date
With regard to “Going Concern” refering to IAS 10, if an event after the reporting date indicates that the entity is no longer a going concern, the financial statements . . . .
for the CURRENT period should NOT be prepared on the going concern.
However if there was reason to believe the entity was no longer a going concern, then the accounts . . . .
would be prepared using the “BREAK-UP BASIS”
What would you do if the accounts needed to be prepared using the “Break-up Basis” referring to an entity no longer a Going Concern?
All assets are VALUED at the Lower of Cost and NRV and
All liabilities are reclassified as current.
Should a non-adjusting event after the reporting date be disclosed?
YES - by note, where the event has a material effect on the financial statements
