Week 2 - Initial Measurement of Inventory

Question 1

What is the standard we look to and what does it say?

Answer 1

IAS 2 inventories - inventory is initially measured at cost

Question 2

So if we are buying in finished goods to sell on…

Answer 2

We use the amount we paid for them - take cost from purchase invoice

Question 3

What are the two main approaches of measuring inventory permitted by IAS2?

Answer 3

FIFO - first in, first out
AVCO - average cost

Question 4

FIFO

Answer 4

Oldest inventory sold first

Question 5

AVCO

Answer 5

Each time new inventory is purchased, re-calculate average per item

Question 6

What is AVCO more appropriate for?

Answer 6

Items where the age of inventory is not important e.g not fresh produce

Question 7

Which method you use doesn’t matter, but what is important is that you…

Answer 7

Inform the users of your financial statements which policy you’ve applied by including a description in the accounting policy section of the financial statements and that you apply your policy consistently

Question 8

What method is not permitted by ISA2?

Answer 8

Last in, first out (LIFO)

Question 9

What are the costs for a good manufacturing items?

Answer 9

• cost of raw materials
• cost of manufacture