IAS 2 Inventories Flashcards
Applies to all inventories except:
(1) financial instruments
(2) biological assets related to agricultural activity and agricultural produce at the point of harvest
Does not apply to the measurement of inventories held by:
(1) producers of agricultural and forest products, agricultural produce after harvest, and minerals products, to the extent that they are measured at net realizable value
(2) commodity broker-traders who measure their inventories at fair value less costs to sell
Those who buy or sell commodities for others or on their account
Broker-traders
These are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services
Inventories
The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale; the net amount an entity expects to realize from the sale of inventory
Net realizable value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; reflects the price at which an orderly transaction to sell the same inventory in the principal market
Fair value
Inventories encompass:
goods purchased and held for resale, or land, other property held for resale, finished goods produced, work in progress/process being produced, and materials and supplies awaiting in the use in the production process
How shall inventories be measured?
At the lower of cost and net realizable value (whichever is lower)
What comprises the cost of inventories?
All costs of purchase, costs of conversions, and other costs incurred in bringing the inventories to their present location and condition
What comprises the purchase price, import duties and other taxes (other than those recoverable from taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials, and services?
Cost of purchase
Formula of cost of purchase
Cost of purchase = Invoice Price - Trade discounts, Rebates, and other similar items (if any) + Directly Attributable Costs
Includes costs directly related to the units of production, systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods
Cost of Conversion
Costs excluded from the cost of inventories and recognized as expenses in the period they are incurred:
(1) ABNORMAL amounts of wasted materials, labor or other production costs
(2) storage costs, unless those costs are NECESSARY in the production process before further production stage
(3) administrative overheads that DO NOT contribute to bringing inventories to their present location and condition
(4) selling costs
The appropriate treatment for items that are segregated for a specific project and are attributed to identified items of inventory
Specific identification of cost
The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific shall be assigned by?
Using specific identification of their individual costs
For all inventories having similar nature and use to the entity, an entity shall use?
the same cost formula
The cost of inventories other than those that are not ordinarily interchangeable and segregated for specific projects shall be assigned by using what cost formula?
First-in First-out (FIFO) or weighted average
For inventories with a different nature or use, may different cost formulas be justified?
Yes
Weighted average formula for periodic inventory system:
Cost of Raw materials available for use divided by Raw Materials available (in units)
How do you compute the weighted average under perpetual inventory system?
Use the moving average, as weighted average under perpetual system has to be calculated every time raw materials are issued
How are inventories written down to net realizable value?
Inventories are written down to net realizable value item by item; however, it is not appropriate to write inventories down on the basis of a classification of inventory or all the inventories in a particular operating segment
What is the basis of estimates in net realizable value?
Based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realize
What is the consideration in estimates of net realizable value
The purpose for which the inventory is held
e.g. The net realizable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price
When are materials and other supplies held for use in production of inventories not written down?
If the finished products in which they will be incorporated are expected to be sold at or above cost
However, when a decline in the price of materials indicates that the cost of the finished products exceeds net realizable value, the materials are written down to net realizable value.
When does the carrying amount of inventories be recognized as an expense?
When inventories are sold
