IAS2 In Inventories And 10 Events After Reporting Period

Question 1

What is inventory?

Answer 1

Assets held for sale (finished goods)
Process of production (work in progress)
Materials to be used in the production process (raw materials)
Measurement of Inventories

Question 2

What is inventory valuation?

Answer 2

Define COST
Purchase / cost of conversion and cost to bring to present location and condition.
May include production overheads based on normal production levels.

Define NET REALISABLE VALUE
Estimated selling prices
less costs to completion less costs to sell.

Question 3

What are the costs basis of inventory?

Answer 3

Cost of purchase = purchase price/ import duties/ handling costs / other acquisition costs
Costs of conversion = production costs e.g. direct labour/ allocation of fixed and variable overheads
Variable production overheads = indirect costs of production vary with volume e.g. heat, light and power
Fixed production costs = indirect costs of production not variable with volume e.g. depreciation/ factory admin costs
Finance costs = can be included if inventory takes substantial time to get ready for sale
(IAS23 Borrowing Costs compliance)

Question 4

What costs are not included in inventory?

Answer 4

Abnormal amounts of wasted materials, labour or other production costs
Excess overheads due to inefficiencies or production problems (note: different to normal capacity)
Storage costs
Administration costs not associated with bringing inventory to present location and condition
Selling and distribution costs
Treated as expenses against profit in period they arise

Question 5

What is first in first out costing?

Answer 5

FIFO (First in First Out) Assumption that oldest inventory sold first / Closing inventory valued at most recent purchase prices

Question 6

What is weighted average costing?

Answer 6

WAC (weighted average cost)-Take total purchase price of all units purchased in period divided by total number of units purchased in the period.

Question 7

What is the periodic and continuous method?

Answer 7

. Periodic uses specific period in time, whereas continuous revalues and recalculates after each shipment of new materials/goods received.

Question 8

Purchases and sales for LGM Ltd for a week:
Day 1 opening inventory nil
Day 1 Purchase 200 units at £15/unit
Day 2 Purchase 100 units at £18/unit
Day 3 sales 250 units at £30/unit
Day 4 Purchase 150 units at £20/unit

Clossing inventory at the end of the week using
FIFO method
AVCO method

Answer 8

Total purchases= 200+100+150=450units
Sales = 250units
Closing inventory = 450-250=200units

Closing inventory at the end of the week:
50 x £18 = £900
150 x £20 = £3,000
FIFO closing inventory = £3,900

Total purchases= 200+100+150=450units
Total cost of purchases:
200 x £15 = £3,000
100 x £18 = £1,800
150 x £20 = £3,000
Total = £7,800
Weighted Average cost = £7,800/450units = £17.33/unit

AVCO closing inventory = 200units x £17.33 = £3,467

Question 9

Unit of inventory related costs:
Raw materials £1.00
Direct labour £0.50

£60,000 of production overhead incurred.

8,000 units produced during year which is lower than
normal level of 10,000 units.
2,000 units had to be scrapped.
At year end 700 units in closing inventory.

What is the cost of closing inventory?

Answer 9

Note : allocation of overheads based on normal level
               of production.
£60,000/10,000 = £6.00 per unit.
Cost per unit
	raw materials				1.00
	direct labour				0.50
	production overheads		           6.00
	Total cost per unit			7.50

Total cost of 700 units in closing inventory =
£5,250 (700 x £7.50)

Question 10

What are the IAS 2 Disclosures?

Answer 10

Accounting policy adopted, including cost formula
Total carrying amount split into:
raw materials
work in progress
finished goods.
Amount of inventory carried at NRV
Amount of inventories recognised as an expense in the period
Explain rationale for any inventories written down to NRV

Question 11

What are IAS 10 events after the reporting period?

Answer 11

Fundamental principle of accounting to use all available information when preparing financial statements
Includes relevant events occurring after the reporting period, up to the date on which the financial statements are authorised for issue
IAS 10 (2007) defines an event after the end of the reporting period as
“events after the end of the reporting period are those
events, favourable and unfavourable, that occur between
the end of the reporting period and the date when the
financial statements are authorised for issue”

Question 12

What are adjusting events?

Answer 12

“those events which provide evidence of conditions that existed at reporting date”

Adjust statements

Question 13

What are non adjusting events?

Answer 13

those that are indicative of conditions that arose after the reporting date”
Do NOT adjust statements
but disclose if material to users’ understanding

Question 14

Should dividends propose after the reporting period be recognised?

Answer 14

No

Question 15

Should dividends proposed before financial statement authorisation, but after reporting date be adjusted for?

Answer 15

No but disclose by a note?

Question 16

If event after the reporting date indicates that the entity is no longer a going concern, should it be adjusted for?

Answer 16

the financial statements for the current period NOT prepared on a going concern basis - NO

Question 17

Give some examples of adjusting events?

Answer 17

Evidence inventory incorrectly valued (carrying value less than cost)
Evidence customer gone into liquidation
Evidence of fraud or error
Evidence of permanent diminution in value of long term investments
Completion of court case entered into pre- reporting date
Completion of insurance claim
Determination after year end of values of sale/ purchase of assets sold / purchased before year end

Question 18

Give some examples of non-adjusting events?

Answer 18

Acquisition or disposal of subsidiary after year end
Announcement of plans to discontinue an operation/or restructure
Destruction of asset by fire / flood after reporting date
Share capital transactions after reporting date
Changes in tax/ exchange rates after reporting date
Strikes/ labour disputes

If event is material - note to accounts required with nature of event and estimate of financial effect

Question 19

Which events are adjusting and which are non adjusting?

Insolvency of a major customer

Decline in market value of investment
Loss of noncurrent assets/inventory due to fire or flood

Discovery of fraud/error showing that the FS were incorrect

Announcement of plan to discontinue certain operations

Evidence concerning the net realisable value of inventory being less than cost

Resolution of a court case after the reporting date

Answer 19

Insolvency of a major customer ADJUSTING

Decline in market value of investment NON
Loss of noncurrent assets/inventory due to fire or flood NON

Discovery of fraud/error showing that the FS were incorrect. ADJUSTING

Announcement of plan to discontinue certain operations NON

Evidence concerning the net realisable value of inventory being less than cost ADJUSTING

Resolution of a court case after the reporting date ADJUSTING

Question 20

How is an event after the reporting date defined?

Answer 20

A event after the reporting date is an event, favourable or unfavourable, which occurs between the statement of financial position date and the date on which the financial statements are authorised for issue

Question 21

What is the difference between an ‘adjusting event’ and a ‘non-adjusting event’?

Answer 21

An adjusting event is a post statement of financial position event which provides additional evidence of a condition existing at the statement of financial position date, and should be reflected in the financial statements.

Question 22

State with reasons whether the following are adjusting or non-adjusting events:
(i) The professional valuation of a building a week after the statement of financial position date at a figure of £200,000 below the current book value. The diminution in value is considered to be permanent.

Answer 22

This is an adjusting event since the valuation provides information about a condition existing at the statement of financial position date.( It would be a non-adjusting event only if it could be demonstrated that the decline in value occurred after the year-end.)

Question 23

State with reasons whether the following are adjusting or non-adjusting events:The declaration of a proposed dividend a week after the statement of financial position date relating to the year ended on the statement of financial position date.

Answer 23

IAS 10 does not allow dividends proposed after the statement of financial position date to be shown as a liability. They are a non-adjusting event and they must be disclosed by note.