TOPIC 7 - IAS 2 - INVENTORIES

Transcription

1 TOPIC 7 - IAS 2 - INVENTORIES Objective of IAS 2 to prescribe how to account for inventories. What are inventories? (a) Goods purchased for resale (b) Finished goods produced (c ) Work in progress (d) Raw materials How should inventories be measured in the financial statements? At the lower of Cost and NRV Cost includes;- (a) Cost of purchase (excludes trade discounts and rebates, includes import duties and transport and handling costs) (b) Cost of conversion Includes;- Costs directly related to the units of production - Direct materials and Direct Labour Allocated Fixed and Variable Production Overheads that are incurred in converting materials into finished goods (c) Any other costs involved in bringing the inventories to their present condition and location. Costs not included are;- Storage Costs (unless those costs are a necessary part of the production process eg whiskey) Abnormal amounts of wasted materials Administrative overheads Selling Costs If a loss is expected on the sale of inventory, the loss should be deducted from the inventory valuation. Future/estimated costs to complete are excluded in arriving at the inventory figure Techniques for the measurement of cost;- (A) Standard Cost (takes account of normal levels of materials, labour & capacity) (B) The Retail Method!! (sales value less percentage for gross margin) 1

2 (C) Cost Formulas such as FIFO or weighted average cost. These formulas are only used when inventories consist of a large number of similar items and specific identification of costs is not appropriate. NRV (Net Realisable Value) : 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. The Cost of Inventories should be assigned by using the First-In, First Out (FIFO) or weighted average cost formulas. The LIFO formula (last in, first out) is not permitted by the revised IAS 2 Changing from FIFO to weighted Average Cost is a change in accounting policy Inventory MUST be valued at the LOWER of cost and NRV. Use of Replacement Cost for Raw Materials: Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when a decline in the price of materials indicates that the cost of the finished products exceeds net realisable value, the materials are written down to net realisable value (i.e. General fall in market selling Prices) In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value. 2

3 Topic 1 - The valuation of Inventory JOHN'S CD SHOP John made the following transactions during the year ended 31/12/2008: Purchases Sales Month CD's Bought Month CD's Sold March 100 at 16 December 130 at 24 September 220 at 19 Note: Assume there was no opening Inventory Requirement (a) Calculate the closing Inventory as at 31/12/08, using: 1 FIFO 2 AVCO (b) Prepare a Trading account for the y/e 31/12/08, using: 1 FIFO 2 AVCO 3

4 (a) Calculate the closing Inventory as at 31/12/08: FIFO : The first goods to be received are the first to be issued. Date Received Issued Balance C/d Mar. 100 at at 16 1,600 Sept. 220 at at 16 1, at 19 4,180 5,780 Dec. 130 at at 19 3,610 AVCO With receipt of goods, the average cost of item of Inventory is recalculated Average Cost Date Received Issued Per CD held No. of Units in Inventory Total Value March 100 at ,600 September 220 at ,780 4

5 December 130 at ,432 (b) Prepare a Trading account for the y/e 31/12/08: FIFO AVCO Sales 3,120 3,120 Less: Cost of Sales Purchases 5,780 5,780 Less Closing Inventory (3,610) (3,432) 2,170 2,348 Gross Profit Past Exam Questions CPA P1 - IAS 2 Past Exam Questions CPA P2 - IAS 2 Q5 Aug 2013 Q (a) Aug 2012 Q3 (2) April 13 Q1 Aug 2011 Q2,Q3 April 2011 Q1 Apr 09 Q2,Q3 April