KAP 5 - Inventories Flashcards

1
Q

How are Inventories Initially Measured?

A

Initial measurement

Inventories are initially measured at “COST” The cost Includes:

  • Purchase costs
    • Import duties
    • Irrecoverable taxes
    • Inbound Transport
    • Handling costs
    • Any other directly attributable costs
    • Less Discounts & Rebates
  • Conversion costs include all direct costs of conversion
    • (materials, labour, expenses, etc.),
    • Proportion of Fixed production overheads
    • Proportion of Variable production overheads
      • Allocation must be based on the normal level of activity.
  • Note on excluded costs - Abnormal wastage, storage costs, administration costs and selling costs, must be excluded from the valuation and charged as expenses in the period in which they are incurred.

IAS 2 allows three methods of arriving at the cost of inventories:

  • Actual unit cost
  • First-in, First-out (FIFO)
  • Weighted Average Cost (AVCO).

Actual unit cost must be used where items of inventory are not ordinarily interchangeable.

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2
Q

How are Inventories Subsequently Measured?

A

Subsequent measurement

  • Inventories may be sold below cost if they are damaged, declined in demand, or if the market is increasingly competitive.
  • Also, items or work in progress is overstated if there has been a rise in the costs required to complete the asset and make the sale.
  • “Work in progress” - items in production but not yet completed is accounted for by separating all purchase costs of raw materials, production costs directly attributable)

As such, IAS 2 requires inventories to be written down to the lower:

  • COST
  • Net Realisable Value (NRV) on a line-by-line basis.

NET REALISABLE VALUE is measured by:

  • Estimated proceeds from selling
    Less: completion costs
    Less: selling costs

    = (NRV)
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3
Q

How is NRV calculated?

Hint

evidence base or estimated?

A

Notes on evidence of NRV

  • NRV of inventory held to satisfy a sales contract is normally evidenced by that contract.
  • Sales of inventory after the reporting date provide strong evidence about its NRV as at the reporting date.

However, in other cases, NRV must be *estimated.*

  • When measuring NRV, similar items to be grouped together, assuming they are sold in the same market.
  • **Raw materials are not written down below cost if the finished good they will form will be sold at a profit.
  • However, a decline in raw material prices would suggest that their NRV has fallen below purchase cost.**
  • *- In such cases, the replacement cost of the raw materials provides evidence of their NRV.**
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4
Q

What are the disclosure requirements of IAS 2:

A

IAS 2:Inventories

Disclosure requirements
Entities should disclose:

  • The total carrying amount of inventories by category
  • Details of inventories carried at net realisable value
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