IAS 2 inventories Flashcards
According to IAS2, inventories are assets which are any of what?
Held for sale in the ordinary course of business
In the process of production for sale
In the form of materials or supplies to be used in production process or providing services
How is inventory recognised?
Opening inventory + purchases - sales = closing inventory
How is inventory recorded in the financial staements?
At the lower of cost and net realisable value
Cost = the total cost incurred in getting the product to its current location and condition
NRV - the price at which the inventory is sold less selling costs
What are the methods for valuing inventory?
FIFO - first in, first out
LIFO - Last in, first out.
LIFO is not acceptable under IAS 2 because the age of inventories affects total purchasing costs because most recent items will be affected by inflation
What is the AVCO?
Average cost - a cost method that divides the total cost of inventory purchases within the period by the total no. of items purchased
Total cost of inventory / total inventory purchased
Allowed under IAS2
Calculate FIFIO
Aug 1st purchase 150 units at 50p
Aug 3nd purchase 50 units at 45p
Aug 3rd sales 150 units at £1
Aug 4th purchase 50 units at 60p
150+50+50 = 250 units
Less sales = 100 units closing inventory
500.6 =30
500.45 = 22.5
£52.5
Calculate AVCO
Aug 1st purchase 150 units at 50p
Aug 3nd purchase 50 units at 45p
Aug 3rd sales 150 units at £1
Aug 4th purchase 50 units at 60p
250 units
1500.5 = £75
500.45 = £22.5
50*0.6 = £30
= £127.50
£127.50 / 250 = £0.51
£0.51 * 100 = £51
What are the components cost?
Some costs go towards inventory, some don’t
Purchase costs
Conversion costs
FInancing costs
What are purchasing costs?
The purchase price of inventory plus all other costs of acquisition, such as freight charges, customs duty, taxes not recoverable and fees paid for acquisition
What are conversion costs?
The costs incurred by an entity during the production of goods, including direct costs and production overheads
Variable production overheads - indirect costs that fluctuate with the level of business activity
Fixed production overheads - indirect costs that remain the same despite fluctuating levels of business activity
SHould conversion costs be included in inventory valuation?
Conversion costs should be included in the inventory valuation, including the standard fixed overhead per unit
What are financing costs?
The costs incurred by borrowing money to fund production or purchases, such as interest on a loan
What should not be included in the measurement of inventory?
The cost of abnormal levels of wastage
Costs for storage that are not related to the production process
GA costs that are not related to production
Selling and distribution costs
What disclosures need to be made under IAS2?
The accounting policies adopted in measuring inventories, including the cost formula used
The total amount of inventories in classifications appropriate to the business
The carrying amount of inventories carried at fair value less costs to sell
