IAS 2 - Inventory

Question 1

The cost of inventories comprises all of the following:

Answer 1

• costs of purchase
• ‘other costs’ incurred in bringing the inventories to their present location and condition
• costs of conversion

Question 2

Which of the following can be included in the cost of inventory:

• carriage inwards
• import duties
• other handling costs
• salary of person in accounting department

Answer 2

• carriage inwards
• import duties
• other handling costs

Question 3

What type of conversation costs can be included in the costs of inventory for manufacturing companies?

Answer 3

In addition to direct conversation costs it can also include variable and fixed manufacturing OVERHEADS such as depreciation of factory building and plant as well as variable labor cost.

Question 4

Can general administration overheads be included in the inventory amount?

Answer 4

No because general administration overheads do not contribute to bringing inventories to their present location and condition.

Question 5

SAGS - the costs to exclude from inventory valuation

Answer 5

S - Selling costs
A - Abnormal amounts of wasted material, labour and other production costs
G - General administrative overheads
S - Storage

Question 6

Definition inventory

Answer 6

Assets:

• held for sale in ordinary course of business
• in the process of production for sale
• in the form of materials or supplies to be consumed in the production process or in the rendering of services

Question 7

How should inventories be valued?

Answer 7

• At lower of cost and net realisable value of separate items of stock of group of similar items
• on FIFO basis or weighted average method

Question 8

Define net realisable value

Answer 8

Estimated selling price (ordinary course of business) less estimated completion and selling costs.

Question 9

What additional information should be provided in the notes?

Answer 9

Inventories should be sub-classified in the notes into main categories (e.g. Raw materials, work-in-progress, finished goods)

Question 10

What are the key- disclosures of IAS 2 (inventories)

Answer 10

• accounting policies adopted
• any inventories at fair value less costs to sell
• the write-down of inventories and any reversal of write-down