IAS 02: INVENTORIES

Ø Understanding definition of IAS 02

Ø Determinating the cost of inventories

LEARNING Ø Acknowledging formulas for Inventory

OBJECTIVES – valuing

Ø Disclosure requirements for

Inventories

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 History of IAS 2
September August
December 1993
1974 1991 IAS 9 (1993)
1 3
Inventories issued

Exposure Exposure Draft

E38 Inventories 4

Draft E2 5

published
18 December 2003
IAS
2

October 1975 2 Inventories issued

IAS 2 issued
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 v Inventories include assets
§ Held for sale

DEFINITION
§ In the production process for sale

§ Raw materials and supplies (In production )

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 v Inventories exclude:
§ Work in process arising under
construction contracts (see IAS
11 Construction Contracts)
DEFINITION § Financial instruments (see IAS 39/
IFRS 9)

§ Biological assets related to

agriculture (IAS 41)
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 Ø Cost should include:
o Costs of purchase
MEASUREM
o Cost of conversion
ENT OF
INVENTORIE o Other costs incurred in
S bringing the inventories to
their present location and
condition
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 Ø Cost of purchase:
= Purchase price
MEASUREMEN + Import duties and other taxes
T OF + Transport, handling and other directly
INVENTORIES attributable costs to the acquisition
- Trade discount
- Rebates

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 Ø Cost of conversion
o Direct costs (direct material + direct
labour)
MEASUREMENT
OF o Indirect costs (Fixed manufacturing
INVENTORIES overheads + variable manufacturing
overheads)
Note: Fixed manufacturing overheads must
be allocated on the basis of the normal
capacity of the production facilities 8
 Ø Other costs
§ Non-production overheads

MEASUREMEN § The cost of designing products for specific

T OF customers
INVENTORIES Note: In some cases, borrowing costs (interest)
can be included in cost of inventories (IAS
2.17 and IAS 23.4)

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 Ø Inventory cost should not include
o Abnormal waste
o Storage costs
MEASUREMEN o Administrative overheads unrelated to
T OF production
INVENTORIES o Selling costs
o Foreign exchange differences arising directly
o Interest cost when inventories are purchased
with deferred settlement terms
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 Ø Standard costs:
TECHNIQUES Are set up to take account of normal
FOR production values
MEASUREMENT Ø Retail method:
COST
Widely used in retail industry, based
on cost – to – retail ratio

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 Example for retail method
X Corporation sells home coffee roasters for an average of
$200, and which cost it $140. Milagro’s beginning inventory
has a cost of $1,000,000, it paid $1,800,000 for purchases
during the month, and it had sales of $2,400,000. The
calculation of its ending inventory is:

Beginning inventory $1,000,000

+ Purchases $1,800,000
= Goods available for sale $2,800,000
- COGS $1,680,000 (2,400,000 x
(140/200))
= Ending inventory $1,120,000 12
 ◦ First - in, First – Out (FIFO)
◦ Weighted – average cost (WAC)

Note: The same cost formula should be

Cost Formulas used for all inventories with similar
characteristics as to their nature and use to
the entity. For groups of inventories that
have different characteristics, different cost
formulas may be justified

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 v First – in, First – out (FIFO)
§ This method assumes that the first unit acquired
are the first unit sold
§ The cost of ending inventories is that of the most
Cost Formulas recent purchases
§ A major criticism of FIFO: Improper matching of
cost with revenues since the cost of goods sold is
computed on the bases of old price that are
possibly unrealistic

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 Example for FIFO
Purchases Sales Balance
Month Quantit Price Value Quantit Value
y ($) ($) y Price ($) Quantity Price ($) ($)
50 5 250 50 5 250
01-Jan-22
30 5 20 5 100
25-Jan-22
20 5
60 6 360 460
02-Feb-22 60 6
20 x 5
50 30 6 180
28-Feb-22 30 x 6
30 6
100 8 800 980
03-Mar-22 100 8
30 x 6
80 50 8 400
30-Mar-22 50 x 8 15
 v Weighted Average Cost (WAC)
§ This method assumes that the goods available for
the sale are homogeneous
Cost § The average cost is computed by dividing the cost
of goods available for sale by the number of the
Formulas
units available by sale
§ The major criticism of WAC is that it assigns no
more importance to current prices than to past
prices paid several months ago

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 ◦ NRV is defined as “estimated selling
price in the ordinary course of
Net Realisable
business less the estimated costs of
Value (NRV)
completion and the estimated costs
necessary to make the sale

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 Measurement

Initial Subsequently
Cost of purchase + Lower of Cost or NRV (Net realisable
Cost of conversion +
Other costs value)
Retail Method

FIFO Estimated selling

Standard Cost WAC price – estimated
Specific identification costs

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 Practice Question
You are preparing the financial statements for a business.
The cost of the items in closing inventory is $42,000. This
includes some items which cost $2,000 and which were
damaged in transit. You have estimated that it will cost
$400 to repair the items, and they can then be sold for
$1,200.
What is the correct inventory valuation for inclusion in the
financial statements

Answer: $42,000 - $2,000 + ($1,200 - $400) = $40,800

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Company W sell three kinds of product, including Basic, Super and
Luxury. The following information was available at the year end
Basic Super Luxury
$ per unit $ per unit $ per unit
Original cost 16 25 33
Estimated selling 19 32 30
price
Selling and 2 8 10
distribution costs
units units units
Units of inventory 200 250 150
What is the value of inventory at the year end? 20
 Net Lower of Units Value
Cost realisable cost & NRV
value
$ $ $ $
Basic 16 17 16 200 3,200

Super 25 24 24 250 6,000

Luxury 33 20 20 150 3,000

12,200
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 IAS 2 Inventories defines the items that may be included in
computing the cost of an inventory of finished goods manufactured
by a business.
Which one of the following lists consists only of items which may be
included in the cost of inventories, according to IAS 2
A. Supervisor’s wages, carriage inwards, carriage outwards, raw
materials
B. Raw materials, carriage inwards, costs of storage of finished
goods, plant depreciation
C. Plant depreciation, carriage inwards, raw materials, Supervisor’s
wages
D.Carriage outwards, raw materials, Supervisor’s wage, plant depreciation
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A company values its inventory using the first in, first out (FIFO)
method. At 1 May 20X2 the company had 700 engines in
inventory, valued at $200 per each.
During the year ended 30 April 20X3 the following transactions
took place:
20X2
1 July Purchased 600 engines at $250 each
1 November Sold 500 engines for $200,000
20X3
1 February Purchased 400 engines at $300 each
15 April Sold 350 engines for $175,000
What is the value of the company’s closing inventory of engines
on 30 April 20X3?
Solution: 450 x $250 + 400 x $300 = $232,500 23
The information below relates to inventory item Y
March 1 50 units held in opening inventory
at a cost of $50 per unit
17 100 units purchased at a cost of
$59 per unit
31 145 units sold at a selling price of
$110 per unit

Under Weighted Average Cost, what is the value of

inventory held for item at the end of March 31?
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 Cost of Balance in
Date Unit Unit cost
issues inventory
1-Mar 50 $ 50 $ 2,500
17-Mar 100 $ 59 $ 5,900
150 $ 56 $ 8,400

31-Mar -145 $ 56 -$ 8,120

5$ 56 $ 280

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A company has following transactions with its product Z
Jan 01 2021 Opening inventory: 0 unit
Feb 01 2021 Buy 20 units at $700 per unit
Mar 01 2021 Buy 25 units at $600 per unit
Apr 01 2021 Sell 15 units at $1000 per unit
Sep 01 2021 Buy 12 units at $500 per unit
Dec 01 2021 Sell 24 units at $1000 per unit
The company used periodic weighted average cost to value its
inventory. What is the inventory value at the end of the year?

Price per unit: (20 x $700) + ( 25 x $600) + (12 x $500) /

(0+20+25+12) = ~$614 per unit
Valuation of closing inventory: (20+25-15+12-24) x $614 =
$11,052 26
 ◦ When inventories are sold and revenue is
recognised, the carrying amount of those
inventories is recognised as an expense
Expense
(often called cost-of-goods-sold). Any
recognition
write-down to NRV and any inventory
losses are also recognised as an expense
when they occur [IAS 2.34]

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 v Required disclosures: [IAS 2.36]
§ Accounting policy for inventories
§ Carrying amount, generally classified as
merchandise, supplies, materials, work in
Disclosures progress, and finished goods. The
classifications depend on what is appropriate
for the entity
§ Carrying amount of any inventories carried at
fair value less costs to sell
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 § Amount of any write-down of inventories
recognised as an expense in the period
§ Amount of any reversal of a write-down to
NRV and the circumstances that led to such
Disclosures reversal
§ Carrying amount of inventories pledged as
security for liabilities
§ Cost of inventories recognised as expense
(cost of goods sold).
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Thank you for watching

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