FAR 7.09 - INVENTORY UNDER IFRS

Question 1

FAR 7.09 - INVENTORY UNDER IFRS

Alexes Co values its inventory at the lower of cost or net realizable value (LCNRV) as required by IFRS. Alexes has the following information regarding its inventory:

Historical cost - $1,000
Estimated selling price - $900
Estimated costs to complete/sell - $50
Replacement cost - $800

What is the amount for inventory that Alexes Co should report on the balance sheet under the lower of cost or net realizable value method?

$900
$750
$1,000
$850

Answer 1

$850

EXPLANATION:

IFRS requires that inventory be reported at the lower of cost, which in this case is $1,000, or net realizable value.

Net realizable value is the sales price of $900 reduced by costs to complete the units as well as costs required to sell the units.

In this case, the estimated cost to complete is $50 and the net realizable value would be $850.

Since $850 is lower than cost, it will be the carrying value of the inventory

Question 2

FAR 7.09 - INVENTORY UNDER IFRS

A manufacturer has the following per-unit costs and values for its sole product:

Cost - $10.00
Current replacement cost - $5.50
Net realizable value - $6.00
Net realizable value less normal profit
margin - $5.20

In accordance with IFRS, what is the per-unit carrying value of inventory in the manufacturer’s statement of financial
position?

$6.00
$10.00
$5.20
$5.50

Answer 2

$6.00

EXPLANATION:

Under IFRS, inventory is valued at the lower of cost or net realizable value.

Because the net realizable value of $6.00
per unit is lower than the cost of $10.00 per unit, the per-unit carrying value of the inventory in the manufacturer’s statement of financial position will be $6.00.

Question 3

FAR 7.09 - INVENTORY UNDER IFRS

Conrad’s Computers, a company that prepares its financial statements under IFRS, supplies computer equipment
to various European governmental agencies on a cost plus basis. Although he sells the computers in the order in
which he acquires them, Conrad wishes to apply the highest costs to computers sold, and the lowest costs to those remaining in inventory. In periods of rising prices, which of the following methods may Conrad use to minimize the amount reported in inventory and maximize the amount charged to cost of sales?

LIFO.
Weighted average.
FIFO.
Specific identification.

Answer 3

Weighted average.

EXPLANATION:

Among FIFO, LIFO, and weighted average, in periods of rising prices, FIFO will result in the highest value of inventory, LIFO the lowest, with average somewhere between.

When goods are sold in the order they are acquired, specific identification will give the same results as FIFO.

Since LIFO is not an acceptable method under IFRS, weighted average will result in the lowest inventory value.