Inventories Flashcards
Accounting standard for inventories
PAS 2
Nature of inventories
Held for sale in the ordinary course of business
In the process of production for such sale
In the form of materials or supplies to be consumed in the production process or in the rendering of services
Also known as FOB origin or FOB seller
Owned by the buyer
Title of ownership transfers upon the goods leaving the seller’s location
FOB shipping point
Owned by the seller
Title of ownership transfers when the goods reach the buyer’s location
FOB buyer
FOB destination
Effect of purchases on inventory
Increase
Effect of purchase returns on inventory
Decrease
Effect: Received from consignors
No effect
Effect: Transferred to consignees
No effect
Effect: Sales
Decrease
Effect: Sales received from consignors
No effect
Sales - consignees
Decrease
Effect: Sales returns in good condition
Increase
Effect: Sales returns - unsalable
No effect
Information is available at the end of each period after the entity has conducted physical count of the goods
Periodic system
Information is readily available from the perpetual records, which is automatically updated for transaction affecting inventories
Perpetual system
Recognition of inventories
Must result in relevant and faithful representation of the information about inventories
Measurement of inventories
Lower of cost and net realizable value (NRV)
What comprises cost of inventories?
Costs of purchase
Costs of conversion
Other costs incurred in bringing the inventories to their present location and condition
Costs incurred to convert materials into finished goods
Costs of conversion
Indirect costs of production that remain relatively constant regardless of the volume of production
Fixed production overhead
Indirect costs of production that vary directly, or nearly directly, with the volume of production
Variable production overheads
Three cost formulas
Specific identification
FIFO
Weighted average
Specific costs are attributed to identified inventory
Specific identification
Items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced
FIFO
The cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period.
Weighted average
Formula of specific identification
Units on hand x specific unit cost
Formula of FIFO
Units on hand x unit cost of latest purchases
Formula of weighted average
Units on hand x weighted average unit cost (WAUC)
WAUC = Total cost of goods available for sale / Total units available for sale
Estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale
NRV
Deduction from the list price given by the seller to the buyer
Trade discount
Deduction from the invoice price given by the seller to thebuyer
Cash discount
