Inventories Flashcards
What is the basic valuation rule for inventory?
Lower of cost and net realisable value (NRV)
This principle ensures that inventory is not overstated on the balance sheet.
What are the main requirements of IAS 2?
Prescribe accounting treatment for inventories and provide guidance on determining cost and recognising expenses
This includes write-downs to NRV and the cost formulas used.
What are the risks associated with inventory accounting?
Creative accounting and manipulation
Inventory valuation can be subject to ethical issues and inconsistencies in accounting practices.
What are the three classifications of inventory?
- Merchandise / goods bought for resale
- Raw materials
- Work in progress
- Finished goods
What does the matching concept in inventory accounting require?
Match the number of goods sold with the cost of the goods sold
Why is the valuation of inventory important?
It is a material amount in the Statement of Financial Position and crucial for profit computation
Over/under valuations distort profit levels and net assets.
What is the formula for calculating Cost of Sales?
Opening Stock + Purchases - Closing Stock
What costs should be included in the measurement of inventory?
- Costs of purchase
- Costs of conversion
- Other costs incurred to bring inventories to their present location and condition
What should NOT be included in inventory costs?
- Abnormal waste
- Storage costs
- Administrative overheads unless related to production
- Selling costs
What are the permitted cost formulas for inventory valuation?
- First in – first out (FIFO)
- Weighted Average/Average Cost (AVCO)
- Standard cost and retail methods if results approximate actual cost
What is net realisable value (NRV)?
Estimated selling price in ordinary course of business less estimated costs of completion and necessary costs to make the sale
When might NRV be lower than cost?
- Increase in costs or fall in selling price
- Physical deterioration of stocks
- Obsolescence of products
- Errors in production or purchasing
What is required if the cost of inventory is greater than NRV?
A write down to NRV is required and is taken to Statement of Comprehensive Income as an expense in the period it occurs
What are the three basic constituents of cost for work in progress?
- Direct materials
- Direct labour
- Appropriate overhead
What should the accounting policy for inventories disclose?
- Carrying amount classified as merchandise, supplies, raw materials, work in progress, finished goods
- Amount of any write down recognised as expense
- Amount of reversal of write down to NRV
True or False: All categories of inventory are valued at the higher of cost or NRV.
False
Fill in the blank: Cost includes cost of purchase, cost of conversion, and any other costs that are ______.
[directly attributable]
What should be assessed each period regarding NRV?
Assess NRV each period and any reversal should be reflected in the Statement of Comprehensive Income in the period it occurs
