INVENTORIES (IAS 2) Flashcards
What assets are classified as inventories? (Definition)
Inventories are assets:
* Held for sale in the ordinary course of business (finished goods)
* In the process of production for such sale (working progress), or
* In the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials).
What are the exception to whom IAS 2 is not applied?
Applies to all inventories, except:
*Work in progress arising under construction contracts (IFRS 15);
*Financial instruments (IAS 32, IAS 39 and IFRS 9);
*Biological assets related to agricultural activity and agricultural produce at the point of harvest (IAS 41)
How are inventories measured?
Inventories shall be measured at the lower of:
- Cost (direct cost)
- Net Realisable Value
What is the difference between Net Realisable Value and Fair Value?
Net realisable value:
* 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.
Fair value:
*Is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Which are the components that made the cost of inventories?
*Costs of purchase
*Costs of conversion
- Net of trade volume rebates (net of discount)
*Other costs incurred in bringing the inventories to their present location and condition
Which costs are included in the costs of purchase?
- Non-recoverable taxes
- Transport
- Import duties
- Handling costs
- Other directly attributable costs
Which costs are included in the costs of conversion?
- Costs directly attributable to units of production (i.e. direct labour);
- Fixed production overheads: based on the normal operating capacity (that takes into account losses from planned maintenance downtime) of production facilities;
-if high production then costs decrease - Variable production overheads: based on the actual use of the production facilities;
What other costs are excluded from the cost of inventories and recognised as an expense?
- Storage costs, unless those costs are necessary in the production process
- Relocation costs
- Selling costs
- Administrative overheads not related to production
- Abnormal amounts of wasted materials, labour, or other production costs
- Interest cost where settlement is deferred
Which are the two techniques for measurement of cost?
- Standard cost method
- Retail method
Which are the Cost formulas that an entity can use to determine cost of inventories?
- Specific identification of costs: used for non-interchangeable items and goods or services produced and segregated for specific projects;
- First-in-first-out (FIFO): used for interchangeable items;
- Weighted average method: used for interchangeable items.
Is LIFO allowed under IFRS?
No
What is the ability of the specific identification costs method? When is it inappropriate?
Ability to manipulate profits by selecting which units to sell based on the unit price of the particular item.
Method is not appropriate where the entity has large numbers of items that are ordinarily interchangeable
How works the FIFO formula?
Formula assumes that inventory on hand at period
end are those items that have been purchased or produced most recently (i.e. whatever has been purchased first is assumed to have been sold first)
How works the Weighted average formula?
Formula assigns a value to each item held in inventory based on opening value of inventory, plus the weighted average of items purchased or produced over the period
What is the Net Realizable Value?
NRV is the estimated selling price in the ordinary course of business
-(less) the estimated costs of completion
-(less) the estimated costs necessary to make the sale
