Transcript IAS 2 Inventoryx
IAS 2 Inventory
IAS 2 does not apply to
• • • • • Work in progress arising under construction contracts including directly related service contracts Financial instruments Biological assets relating to agricultural activity and agricultural product at the point of harvest Producers of agricultural and forest products, minerals and mining products etc Commodity broker – traders that measure their inventories at fair value less selling costs These are all covered under specific standards.
Definition of Inventory
• • • Held for sale in the ordinary course of business In the process of production for such sale (WIP) In the form of materials or supplies to be consumed in the production process or the rendering of services.
Valuation of Inventory
• • • Physical Inventory Count at end of year – guarantees correct quantities Impacts on profits and tax liability in the Statement of Profit & Loss Strengthens the position of the Statement of Financial Position
The larger the closing inventory the smaller the cost of sales, the larger the gross profit
Trading A/C
Trading
Less cost of sales
Opening inventory Purchases 2,000 1,500 3,500 1,200 10,000 Less Closing inventory Cost of Sales 2,300 • • •
GROSS PROFIT
influence profit figures and tax liabilities products that are work in progress etc IAS 2 was introduced to provide clarity
7,700
If a company could manipulate the value of closing inventory, it could Different types of inventory require different treatments. Eg specialist products, custom built items, products that mature in value over time,
Fundamental Principle
• • Inventory valued at the lower of Cost or NRV Prudence – not to overstate/understate the assets
Definition of NRV
• NET Realisable Value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated cost of sale.
NRV greater than Cost but…
• NRV may be lower if… – Damaged – Obsolete – Change in market demand – Physical deterioration
Calculate NRV
• Sale Price – further costs that may be incurred to complete the production of the item – costs to sell and distribute the item
Calculating Cost
• Costs of purchase including tax, import duty, transport and handling – trade discount + Cost of conversion including fixed and variable overheads + other costs incurred in bringing the inventories to their present location and condition
Excluded from Cost
• • • • • Abnormal waste or spoilage Factory Idle time Storage costs – except when necessary in the production process before a production stage. This implies that storage costs of raw materials and finished goods are excluded.
General administration overheads Marketing and other sales costs.
Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method
Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method • Actual Unit Cost Cost of each item valued individually by including all costs incurred to bring it to its present location and condition. Usually only feasible for high valued, low-quantity inventory eg Car dealership
Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method • First In First Out Inventory is made up of the latest purchases.
LIFO method banned.
Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method • Weighted Average Weighted average purchase price over the year used to value closing inventory
Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method • Standard Cost Standard costs reviewed frequently to ensure that they bear a reasonable relationship to actual costs during the period
Measurement
1. Actual unit cost 2. FIFO 3. Weighted average costs 4. Standard cost 5. Retail method • Retail Method Used in retail for measuring large quantity of inventory with similar margins that are rapidly changing. Cost determined by using a reduced sale value.
Write down of inventory to NRV
• • • Where the cost of inventories may not be recoverable e.g. goods are damaged, obsolete or selling prices declined etc. then inventories are written down to value expected to be realised from their sale or use.
Inventories are usually written down to NRV on an item by item basis. Losses associated with write down are an expense in the period of the write down
Reversal of Write Down
• Increase in NRV - Expense “Reversal of Write Down”
Disclosure
The financial statements should disclose the following: a) The accounting policies adopting in measuring inventories, including cost formulas.
b) The total carrying amount of inventories broken into appropriate classifications c) The carrying amount at fair value less costs to date d) The amount expended in the period e) The amount of any writedowns of inventories f) The amount of any reversal of any writedowns.
g) The circumstances or events that led to the writedown(s).
h) The carrying amount of inventories pledged as security for liabilities Common classifications include retail merchandise, production supplies, materials, work in progress and finished goods.
Q1
• Inventories should be valued at the lower of Cost or NRV
Q2
• • • • Stock cost 60,000 NRV 40,000 40,000 x 2.5% = 1,000 Write down = 20,000 + 1,000 = 21,000
Journal Dr
Inventory Write Down Expense A/C (P&L) Inventory A/C (SFP) 21,000 Being the write down of slow moving stock
Cr
21,000
Q3
• The following costs cannot be included as part of the cost of inventory: – Selling costs
Journal
Q4
Dr Cr
• • • + receivables 55,000 + sales 50,000 + VAT 5,000 Receivables 55,000 Sales 50,000 VAT 5,000 Being the sale of goods on credit not accounted for
Journal Dr Cr
• • + Expense 45,000 - CA inventory 45,000 Inventory Expense (P&L) Inventory (SFP) 45,000 45,000 Being the correction of overestimation of closing stock
Q5
• • • Write down 300,000
Journal
300,000 x 50% = 150,000 Insurance receivable CA Recoverable value
Dr Cr
Inventory expenses (P&L) Inventory (SFP) 300,000 300,000 Being the write down of stock destroyed in fire
Journal Dr Cr
Insurance Compensation Receivable (SFP) Compensation receivable (SPL) 150,000 150,000 Being the compensation for stock destroyed in fire
Journal
• • + receivables 50 x 280 + sales 50 x 280 Receivables
Q6
Dr
14,000 Sales
Cr
14,000 Being the sale of goods on credit not accounted for • • 700 x 280 = 196,000 750 x 300 = 225,000 • • Adjustment 29,000 + expense - CA inventory
Journal Dr Cr
Inventory expense (P&L) Inventory (SFP) 29,000 Being the write down of inventory to NRV 29,000
NRV
Selling Price Sales & Marketing Delivery to customer
NRV P
150 (15) (21)
114 Cost
Purchase Cost Delivery from Supplier Import Duty
COST P
100 20 1.20
121.20
Q7
Q
295 (18) (40)
237 Q
200 30 2.60
232.60
Week
Open Week 1 Week 2 Week 3 Week 4 Bought Used Bought Used
Qty
140 140 -195 80 -100
Q9
€
10 13 140 x 10 55 x 13 11 85 x 13 15 x 11 Balance
AVCO
(140 * 10) + (140 * 13) 280 (85*11.50) + (80*11) 160 11.50
11.61
65 11.50 * 195 2242.50
11.61 * 100 1160.00
€
1,820 1400 715 2115 880 1105 165 1270
Balance
1,400 3,220 1105 1985 715 (140 * 10) + (140 * 13) + (80*11) 360 4100/360 = 11.39
65 * 11.39 = 740.27
Q10
• • • IAS 2 states that inventory be measured as the lower of cost or Net Realisable Value Cost = cost of purchase and cost of conversion NRV = actual or estimated selling price less and further costs of conversion
Cost
Materials Labour Depreciation Factory Rates Factory Expenses Other production Expenses
500 tables
1 table 50 x 130
NRV
15,000 Selling Price 20,000 Less Marketing Costs 10,000 1 table 5,000 50 x 225 10,000 5,000
6,500
130 6,500 250 25 225 11,250