IIAAÄS 2 - Inventooriiees

Question 1

TÄRKEÄ: What is IAS 2?

Answer 1

IAS 2 inventories is a standard which established the accounting and reporting of invetory. The focal point of IAS 2 is to prescribe the accounting treatment for inventories in the financial statements.

Question 2

Biological asset?

Answer 2

Biological asset = a living animal or a plant

Question 3

Cost of conversion?

Answer 3

Cost of conversion = are costs directly related to the units of production, such as direct labor together with a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods.

Question 4

Cost of purchase?

Answer 4

Cost of purchase = all of the purchase price, import duties and other taxes (other than those subsequently recoverable by the enterprise from the taxing authorities) and transport, handling and other costs directly attributable to the acquisition of the item. Trade discounts, rebates, and other similar items are deducted in determining the costs of purchase.

Question 5

FIFO?

Answer 5

FIFO = first-in, first-out is the assumption that the items of inventory which were purchased first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced.

Question 6

Inventory?

Answer 6

Inventories (= vaihto-omaisuus) are assets:

a) Held for sale in the ordinary course of business,
b) In the process of production for such sale, or
c) In the form of materials or supplies to be consumed in the production process or in the rendering of services.

Question 7

Net Realizable Value (NRV)?

Answer 7

Net Realizable Value (NRV) = is 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.

Question 8

Recoverable amount?

Answer 8

Recoverable amount = is the amount higher of an asset’s net selling price and its value in use.

Question 9

What GUIDANCE does IAS 2 provide?

Answer 9

The benefits of IAS 2 gives guidance on:

a) Amount of inventory costs to recognize as an asset or expense in the financial statements
b) Amount og inventory costs to carry forward until recognition of associated revenue
c) How to determine and assign inventory costs using costing formulas
d) When and how to report inventories at their net realizable values
e) Types of inventories to include and exclude from the scope of the Standard

Question 10

What GUIDANCE also does IAS 2 provide?

Answer 10

The benefits of IAS 2 are that it provides guidance on:

a) Differentiating inventories from other assets
b) Determination of inventory cost
c) Cost formula that should be used to assign costs to inventories, when specific identification is not appropriate
d) When inventories should be expensed
e) Circumstances leading to and the treatment of inventory write-downs
f) The disclosures that an entity should include in its financial statements with regard to inventories

Question 11

What is IFRS 13 and how it is connected with IAS 2?

Answer 11

IFRS 13 Fair Value Measurement establishes a single source of guidance for fair value measurement under IFRSs. IFRS 13 does not apply to net realizable value transactions within the scope of IAS 2.

Question 12

To what IAS 2 does not apply to? Eli What is NOT in the scope of IAS 2?

Answer 12

IAS 2 generally applies to all inventory. However, IAS 2 does NOT apply to:

1. Work in progress (WIP) arising under construction contracts, including directly related service contracts. This is covered in IAS 11 Construction contracts
2. Financial instruments: Are covered in IAS 32 and IFRS 9 (or, if not yet adopted, IAS 39)
3. Inventories of agricultural and forest products, mineral ores and agricultural produce to the extent that they are measured at net realizable value in accordance with the well established practices in certain industries (no specific standard on point)
4. Biological assets related to agricultural activity (covered in IAS 41 Agriculture)
5. Commodity broker-traders who measure their inventories at fair value less costs to sell

Question 13

Is the lumber of a furniture manufactrues classified as an inventory?

Answer 13

The lumber of a furniture manufactrues IS INFACTS classified as an inventory because it is an asset. So it is in the scope of IAS 2.

a) Held for sale in the ordinary course of business
b) In the process of production for such a sale
c) In the form of materials or supplies to be consumed in the production process.

WIP of construction contracts is outside the scope of IAS 2. Although such WIP has similar characteristics of an inventory, the cost of an assigned inventory is based on the amount of revenue recognized.

Question 14

Are the chickens of a poultry farmer inventory in the scope of IAS 2?

Answer 14

The chickens of a poultry farmer are BIOLOGICAL ASSETS accounted for under IAS 41 Agriculture. However, when the chickens are slaughtered and after the point of harvest (as defined in IAS 41), the produce IS an inventory accounted for under IAS 2.

Question 15

Lue: Expenses relating to inventory

Answer 15

When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period in which the related revenue is recognized.

The presentation of the expense relating to an inventory is presented in the statement of comprehensive income depending on whether the expenses are presented by nature or by function.

Question 16

What are the five main forms of inventories?

Answer 16

1. Raw materials: are materials that are used in the production process.
2. Work in progress: is an inventory for which the production process is not yet complete.
3. Finished goods: are types of inventories that are complete and ready for sale.
4. Merchandise: are goods that are purchased and held for sale, for example, by a retailer.
5. Amounts allocated to an inventory: include labor and other costs of personnel directly involved in the manufacturing in process. In the case of service providers, such costs are capitalized as inventory to the extent that the related revenue has not been recognized. It can also include allocated overheads.

R W F M A -> RAW Moth.F.

Question 17

Inventories of Service Providers?

Answer 17

Service providers primarily derive revenues from providing services, as opposed to the sale of products or goods.

The costs classified as inventories consist mainly of labor and other costs of personnel, as well as other attributable overheads directly related to providing the services. The cost of inventories of a service provider does not include profit margins or non-production costs that are often factored into prices by service providers.

Question 18

If a property is held for sale for resale purposes in ordinary course of business?

Answer 18

So the property is held for sale for resale purposes in the ordinary course of business for the company, so it IS CLASSIFIED AS INVENTORY.

Question 19

What are the costs included in measuring inventory?

Answer 19

Costs capitalized as inventory includes all cost incurred directly or indirectly that were necessary to bring the inventory to its present condition and location.

The following are the components of cost included in measuring inventory:
a) Costs of pruchase
b) Costs of conversion
c) Other costs

Question 20

Invetories: Costs of purchase?

Answer 20

Costs of purchase includes ALL the costs incurred in the INITIAL acquisition of an inventory, such as purchase price, shipping costs, and any import duties and taxes.

Reflect the final amount allocated to the costs of purchase of an inventory. If there are subsequent adjustments to the costs of purchase, such as rebates or cash discounts, these should be deducted.

PRESENTATION: The entries to record the costs of purchase depend on whether the presentation of expenses in the statement of comprehensive income based on the NATURE OF EXPENSES or the FUNCTION OF EXPENSES within the enterprise.

Question 21

Inventories: Costs of conversion?

Answer 21

Costs of conversion include costs directly related to the units of production, as well as a systematic allocation of fixed and variable overheads that are incurred in converting material to finished goods. Fixed overheads are generally independent of the level of production activity while variable costs are based on production.

a) Example of FIXED COSTS: Fixed costs include depreciation, rent, maintenance, and insurance costs.

b) Example of VARIABLE COSTS: Variable costs include utilities used in production, such as water and electricity. It also includes indirect costs used in production such as indirect material and labor.

Question 22

LUE -> Inventories: Other costs?

Answer 22

Other costs are capitalized to inventory if they meet the conditions to bring inventory to its present location and condition. Example: cost of transporting a product from the factory to its retail locations is capitalized.

Selling and administrative costs are expensed as incurred. Example: cost of storing the product at the retail store

Certain non-production overheads are allocate to inventory. Example: portion of a plant manager’s salary allocated to inventory if it is incurred in bringing the inventory to its present location.

Certain inventory may take a substantial period of time to get ready for its intended sale or use. In some cases, interest costs may be included in the measurement of such inventory under IAS 23 Borrowing costs. Example: Interest costs may be included in maturing inventory, such as whisky. The production period is attributable to bringing the product to its existing condition and so the addition of interest is therefore permissible under the allowed alternative treatment of IAS 23.

Question 23

Measuring inventory depends on what two factors?

Answer 23

Measuring inventory depends on two factors:
1. Technique used
2. Cost formula applied

The nature of the inventory generally determines the technique and the formula used.

Question 24

What are two examples of techniques used for the measurement of costs of inventories?

Answer 24

Examples of techniques used for the measurement of costs of inventories include the standard cost method and the retail method, which are the most common.

a) STANDARD COST METHOD: considers normal levels of materials and supplies, labor, efficiency and capacity utilization.

b) RETAIL METHOD: as the name suggests, is used in the retail industry to measure relatively homogenous inventories with similar margins.

Inventory cost is determined by reducing the sales value of the inventory by the appropriate percentage gross margin.

Question 25

Invetories: What are examples of Cost formulae?

Answer 25

Once chosen, the cost formula should be applied consistently to all inventories that have a similar nature and use.

a) SPECIFIC IDENTIFICATION: is used for unique inventory, i.e. the inventory is not routinely mass-produced or ordinarily interchangable. Examples: rare jewelry and custom-made equipment.

b) WEIGHTED AVERAGE: is a cost formula represents the average cost of inventory units for the period of time associated with inventory on hand. Under the weighted average cost formula, the cost of each item is based on the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or pdoruced during the period. This method is used for normal inventory that is ordinarily interchangeable such as clothing for a retailer.

c) FIRST-IN, FIRST-OUT (FIFO): method assumes that the inventory purchased first is sold first. The remaining inventory at the end of the period consists of he most recent purchases.

Question 26

How should inventory be measured according to IAS 2?

Answer 26

IAS 2 states that an inventory should measured at the lower of:
a) Cost, or
b) Net realizable value (NRV)

An asset should not be carried at an amount more than its recoverable amount, i.e., NRV for inventories.

Question 27

NRV estimates are made at the end of each period to determine whether a write-down for any item of the inventory should be recognized or reversed. What are the three different sets of circumstances?

Answer 27

1) UNRECOVERABLE: If circumstances cause the cost of inventory to be unrecoverable (esim. Due to damage or obsolescence), a write-down of the inventory to NRV is recognized as an expense.

2) REVERSALS: If the circumstances that caused the write-down no longer exist or if there has been a positive change in circumstances, the previous write-down is reversed. The new carrying amount is the lower of the cost and the revised net realizable value.

3) SOLD ABOVE AND BELOW COST: For production materials and supplies, if the NRV is below cost, it may not be necessary to write them down if the finished product in which they will be incorporated is expected to be sold at or above its cost.