Inventories Flashcards
What are stocks/inventories?
Stocks/inventories are comprised of goods or other assets purchased for resale, consumable stores, raw materials and components purchased for incorporation into products for sale, products and services at intermediate states of completion (work in progress), and finished goods
What are inventories accord to IAS 2 and FRS 102?
Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services
Why is inventory figure so important?
It has a direct impact on determining profit and loss and the valuation of assets in the balance sheet, and it is necessary to determine cost of goods sold during period and the amount that should be carried forward as an asset to be matched against future sales
What will an increase in closing stock do?
It will reduce cost of sales and increase (also an increase in net assets in BS)
What will a decrease in closing stock do?
It will increase cost of sales and reduce profit (also a decrease in net assets in BS)
What do the accounting standards say about closing stock?
Stock should be stated at lower of cost and net realisable value, and a comparison should be carried out for each item of stock or groups of similar items
What constitutes cost under FRS 102/IAS 2?
Expenditure incurred in the normal course of business in bringing product/service to its present location and condition, costs of purchase plus cost of conversion
What are examples of cost of purchases?
Purchase price incl. import duties, transport and handling costs, rebates, subsidies, and any other directly attributable costs less trade discounts
What is cost of conversion?
Costs specifically attributable to units of production (e.g. labour, direct expenses, sub-contract work), production overheads, and other overheads, if any, attributable in the particular circumstances of the business to bringing the product/service to its present location and condition
What are production overheads?
Overhead in respect of materials, labour or service for production based on normal level of activity, taking one year with another
What should be considered when determining normal level of activity?
Volume of production which facilities are intended, budgeted level of activity for this and next year, actual level of activity for this and previous years
What constitutes NRV?
Estimated sales price less costs to complete and sell
When might NRV be less than cost?
Increase in cost/fall in selling price, physical deterioration of stock, obsolescence of production, decision as part of company marketing strategy to manufacture and sell products at a loss, and errors in production and purchasing
What are the common methods when making a choice for stock costing?
FIFO (First in first out) and LIFO (Last in first out), and weighted average
How do we calculate the weighted average?
Total cost / number of units
