D1-IAS 2 Inventory

Question 1

1. scope of inventories

Answer 1

inventories include assets helf for sale in the ordinary course of business(finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production( raw materials)

Question 2

2. fundamental principle of IAS 2

Answer 2

inventories are required to be stated at the lower of cost and net realisable value (NRV)

Question 3

3. measurement of inventories

Answer 3

cost should include all :

1. costs of purchase (including taxes, transport, and handling) net of trade discounts received.
2. cost of conversion (including labour, a share of fixed production overheads and variable production overheads)
3. other costs incurred in bringing the inventories to their present location and condition

Question 4

4. measurement of inventories

Answer 4

inventory cost should not include:

• abnormal waste
• storage costs
• administrative overheads unrelated to production
• selling costs
• foreigh exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
• interest cost when inventories are purchased with deferred settlement terms.

Question 5

5. measurement of inventories

Answer 5

1. for inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory.
2. the same cost formula should be sued for all inventories with similar characteristics as to their nature and use to the entity. for groups of inventories that have different characteristics, different cost formulas may be justified.

Question 6

6. write-down to net realisable value

Answer 6

NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale.

Question 7

7.impact on profit and cash flows

Answer 7

1. any write-down to NRV should be recognised as anexpense in the period in which the write-down occurs. any reversal should be recognised in the income statement in the period in which the reversal occurs.
2. the write-down would reduce the value of inventory in the statement of financial position and correspondingly increase the cost of sales thus lowering profits.
3. cash flow is unaffected by the write-down as there has been no cash transactions and the write-down will therefore just require a journal entry in the nominal ledger.