IAS 2 Inventories

Question 1

Applies to all inventories except:

Answer 1

(1) financial instruments

(2) biological assets related to agricultural activity and agricultural produce at the point of harvest

Question 2

Does not apply to the measurement of inventories held by:

Answer 2

(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

Question 3

Those who buy or sell commodities for others or on their account

Answer 3

Broker-traders

Question 4

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

Answer 4

Inventories

Question 5

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

Answer 5

Net realizable value

Question 6

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

Answer 6

Fair value

Question 7

Inventories encompass:

Answer 7

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

Question 8

How shall inventories be measured?

Answer 8

At the lower of cost and net realizable value (whichever is lower)

Question 9

What comprises the cost of inventories?

Answer 9

All costs of purchase, costs of conversions, and other costs incurred in bringing the inventories to their present location and condition

Question 10

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?

Answer 10

Cost of purchase

Question 11

Formula of cost of purchase

Answer 11

Cost of purchase = Invoice Price - Trade discounts, Rebates, and other similar items (if any) + Directly Attributable Costs

Question 12

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

Answer 12

Cost of Conversion

Question 13

Costs excluded from the cost of inventories and recognized as expenses in the period they are incurred:

Answer 13

(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

Question 14

The appropriate treatment for items that are segregated for a specific project and are attributed to identified items of inventory

Answer 14

Specific identification of cost

Question 15

The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific shall be assigned by?

Answer 15

Using specific identification of their individual costs

Question 16

For all inventories having similar nature and use to the entity, an entity shall use?

Answer 16

the same cost formula

Question 17

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?

Answer 17

First-in First-out (FIFO) or weighted average

Question 18

For inventories with a different nature or use, may different cost formulas be justified?

Answer 18

Yes

Question 19

Weighted average formula for periodic inventory system:

Answer 19

Cost of Raw materials available for use divided by Raw Materials available (in units)

Question 20

How do you compute the weighted average under perpetual inventory system?

Answer 20

Use the moving average, as weighted average under perpetual system has to be calculated every time raw materials are issued

Question 21

How are inventories written down to net realizable value?

Answer 21

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

Question 22

What is the basis of estimates in net realizable value?

Answer 22

Based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realize

Question 23

What is the consideration in estimates of net realizable value

Answer 23

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

Question 24

When are materials and other supplies held for use in production of inventories not written down?

Answer 24

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.

Question 25

When does the carrying amount of inventories be recognized as an expense?

Answer 25

When inventories are sold