IAS 2: Inventories Flashcards
IAS 2 Applies to all inventories except
(1) Work In Progress arising under construction contracts, (2) Financial Instruments, (3) Biological Assets (agricultural activity) and Agricultural Produce at the point of harvest
IAS 2 does not apply to the measurement of inventories held by
(1) Agricultural, Forest, Minerals and (2) Commodity broker-traders who measure their inventories at FV less costs to sell
Inventories are:
(1) held for sale in the ordinary course of business (2) in the process of production for such sale (3) in the form of materials/supplies to be consumed in the production process/rendering of services
Net Realisable Value
Estimated selling price in the ordinary course of business - (Estimated costs of completion + Estimated Costs necessary to make the sale)
Fair Value
Amount for which an asset could be exchanged/liability settled between knowledgeable willing parties in an arm’s length transaction
T/F: Inventories encompass goods purchased and held for resale
True.
T/F: In case of a service provider, inventories do not include the costs of the service
False. Inventories for service providers include the costs of service
Inventories shall be measured at the lower of
cost and net realisable value
Cost of Inventories
Costs of (1) purchase, (2), conversion, (3) and other costs incurred in bringing the inventories to their present location and condition
Costs of Purchase comprise:
(1) Purchase Price, (2) Import Duties, (3) Transport Costs. Trade discounts, rebates, and other similar items are deducted.
Costs of Conversion include:
(1) Direct Labour (costs directly related to the units of production) (2) Fixed (constant regardless of the volume of production: depreciation and maintenance of factory buildings and equipment, cost of factory management and admin) and Variable (vary directly with the volume of production: indirect materials, indirect labour) Production Overheads
Cists excluded from the Cost of Inventories and Recognized as Expenses in the period incurred:
(1) Abnormal amounts of wasted materials, labour, or other production costs; (2) Storage Costs unless necessary in the production process before a further production stage; (3) Admin Overheads that do not contribute to bringing inventories to their present location and condition; and (4) Selling Costs
T/F: Borrowing Costs may be sometimes included in the cost of inventories
True. IAS 23 identifies these limited circumstances
When inventories are purchased on deferred settlements terms and the arrangement effectively contains a financing element (such as a difference between the purchase price for normal credit terms and the amount paid), the element is ___
recognized as interest expense over the period of financing
Cost of Agricultural Produce Harvested from Biological Assets
Agricultural produce that an entity has harvested from its biological assets are measured on initial recognition at their FV less costs to sell at the point of harvest.
Cost of Inventories of items that aren’t ordinarily interchangeable and goods/services produced and segregated for specific projects shall be assigned by using ______
Specific Identification of their Individual Costs
T/F: A difference in geographical location of inventories (or in the respective tax rules) is sufficient to justify the use of different cost formulas
False. The difference in geographical location is not enough. An example could be inventories that are used in different operating segments and have different uses in their respective operating segments
T/F: Writing inventories down below cost to net realizable value is consistent with the view that assets should not be carried in excess of amounts expected to be realized from their sale or use
True.
T/F: Inventories are not usually written down to net realizable value item by item.
False. Inventories are usually written down to net realizable value item by item
T/F: It is appropriate to write inventories down on the bases of a calssifaction of inventory, for example, finished goods/all inventories in a particular operating segment
False. This is not appropriate.
If sales contracts are for less than the inventory quantities held, the net realizable value of the excess quantities is based on
General selling prices
T/F: If the finished products, in which materials and other supplies held for use will be incorporated, are expected to be sold at or above cost, then these materials and other supplies held for use in the production of inventories are written down below cost.
False. These Materials and other supplies are NOT written down below cost
When inventories are sold, the carrying amount of those inventories shall be recognized as a/an _____
Expense in the period in which the related revenue is recognized (CGS)
Any write-down of inventories to net realizable value and all losses of inventories shall be recognized as a/an
Expense in the period the write-down or loss occurs.
Reversal of any write-down of inventories, arising from an increase in net realizable value, shall be recognized as a
Reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs
Disclosure. Financial statements shall disclose:
(1) Accounting Policies adopted in measuring inventories including the cost formula used; (2) Total Carrying Amount of Inventories and the carrying amount in classifications appropriate to the entity; (3) Carrying Amount of Inventories carried at FV less costs to sell; (4) Amount of Inventories recognized as an expense during the period (aka Cost of Sales); (5) Write-down of Inventories recognized as an expense in the period; (6) Amount of any reversal of write-down recognized as a reduction in the amount of inventories recognized as expense in the period; (7) Circumstances/Events that caused reversal of write-down; and (8) Carrying Amount of Inventories pledged as Security for Liabilities
Common classifications of inventories:
Merchandise, Production Supplies, Materials, Work in Progress, Finished Goods
I/S by nature: The entity discloses ____
(1) The costs recognized as an expense for raw materials and consumables, (2) labour costs, and other costs together with (3) the amount of the net change in Inventories for the Period
