Chapter 4 - IAS 2 Inventories

Question 1

Inventories as Defined in IAS 2 Inventories:

Answer 1

Inventories are are assets held for sale in the ordinary course of Business.

Inventories take the form of:

• Raw Materials
• Work in Progress
• Finished Goods

Question 2

Items that CAN be included in Inventory Valuation:

Answer 2

• Costs of Purchase (Including import duties, handling costs and Trade Discounts)
• Conversion costs (Direct Labour, Expenses and Production Overheads)
• Other Overheads to bring the item to its location and condition

Question 3

Items that CANNOT be included in Inventory Valuation:

Answer 3

• Abnormal Waste
• Storage Costs
• Non Production overheads (Admin)
• Selling costs
• Interest on items with deferred settlement terms

Question 4

Accounting Treatment for Inventories:

Answer 4

• Inventories are assets held for sale in the ordinary course of business
• Inventories are finished goods
• Inventories are valued at the lower of Cost and Net Realisable Value
• Cost for Inventories are purchase costs net of discounts and costs bringing items to their current condition and location

Question 5

Why Notes Relating to Inventories are useful to Users of Financial Statements:

Answer 5

• Allows the user to determine the valuation method
• Inventories are usually a significant figure in the Financial Statements so it is important for the user to understand how the value has been determined