Inventory

Question 1

What is inventory

Answer 1

Raw materials - goods purchased before production (steel)

Work in progress - goods in the manufacturing process

Consumables - goods not intended for resale (stationary)

Goods for resale - (apples)

Finished goods - (cars)

Question 2

Definition of inventory

Answer 2

IAS 2

Goods held for resale in the ordinary course of business

Assets in the process of production for sale

Materials or supplies to be consumed in the production process or rendering a service

Question 3

IAS 2 inventory

Answer 3

Closing inventory is in cost of sales in the P/L sheet and a current asset in the balance sheet

Valued at the year end stocktake - physical or stock records

If it is over valued both assets and profit will be overstated

Question 4

IAS 2 : valuation

Answer 4

Lower of

1) cost- purchase price,conversion costs and cost of bringing goods to their present location and condition. E.g. import duties, transport costs

And

2) Net realisable value - selling price less :
A) cost of putting goods into a saleable condition
B) selling, marketing and distribution costs

Question 5

Example

100 shirts bought for £20 each in nov 2015 and sold for £50 each in jan 2016

Answer 5

Use 2000 as closing inventory
And cost of sales

Use cost as it is lower than NRV(50)

Question 6

Conversion costs

Answer 6

Conversion costs are costs directly related to production (eg direct materials, direct labour ) plus a systemic allocation of fixed and variable production overheads

Fixed production overheads are indirect costs of production which remain fairly constant (eg depreciation of factory buildings, costs of factory management)

Variable production overheads are indirect costs of production which vary with volume of production (indirect materials and labour )

Question 7

Costs excluded from cost of inventories

Answer 7

Storage costs, unless necessary in the production process before a further production stage

Administrative overheads not incurred to bring inventories to their present location or condition

Selling costs

Question 8

Cost

Answer 8

There are two methods of calculating cost under IAS 2

1) First in First out (FIFO)
- goods sold in order in which received
Eg 1jan bought 30 units at £1, then 10 issues out

Then 12 jan buy 20 at £1.10 and 25 out

Means no more £1 units and only 15 units at £1.10

2) AVCO
- average cost is calculated each time new goods are received

At each purchase recalculate value of inventory :

Existing stock value + latest purchase
/ no. Units
=

average cost per unit