08 Ias 2

IAS 2 Inventories
08
DEFINITIONS |1
are assets:
(a) held for sale in the ordinary course of business (finished goods);
(b) in the process of production for such sale (WIP); or
Inventories
(c) in the form of materials or supplies to be consumed in the
production process or in the rendering of services (raw materials
and other supplies).
is the estimated selling price in the ordinary course of business less
NRV the estimated costs of completion and
the estimated costs necessary to make the sale.
QUESTION 01
An entity has work in process inventory. Till now the cost of Rs. 70,000 has been spent on
this inventory. The estimated cost to convert the WIP inventory into finished goods is Rs.
48,000.
The estimated selling price of inventory if sold in its present condition is Rs. 70,500 and if
sold after it has been converted to finished goods is Rs. 120,000. The entity has to pay 2%
commission to its distributors. The entity does not sell the incomplete inventory.
Required:
Calculate NRV and explain at which amount the inventories should appear in SFP.
MEASUREMENT
Allowed policy Inventories are valued at lower of cost and NRV.
COST OF INVENTORIES: GENERAL

The costs of inventories shall comprise:
(a) all costs of purchase,
(b) costs of conversion,
Costs of
(c) other costs incurred in bringing the inventories into their present
Inventories
location and condition. For example, it may be appropriate to
include non-POH or the costs of designing products for specific
customers in the cost of inventories.
Purchase price
XX
Non-refundable/adjustable import duties and taxes XX
Costs of Transport and handling costs XX
Purchase Other costs directly attributable to acquisition
XX
Trade discounts and rebates (X)
XX
These include:
(a) costs directly related to the units of production, such as direct
Costs of
labour
Conversion
(b) a systematic allocation of fixed and variable POH that are incurred
in converting materials into finished goods.
ICMAP M4 Financial Accounting
The conversion costs are included in inventory on the basis of following

level of productions:
Level of
 Direct labour etc  actual level of production
Production
 Variable POH  actual level of production
 Fixed POH  normal or actual, whichever is higher
Examples of costs excluded from the cost of inventories and recognised
2| as expenses in the period in which they are incurred are:
Costs to be (a) abnormal amounts and wastages;
excluded (b) storage costs, unless necessary for the production process;
(c) administrative overheads; and
(d) selling costs.
Deferred
Settlement amount paid – purchase price for normal credit terms = interest expense
Terms
QUESTION 02
ABC Limited purchased material worth cash price of Rs. 5,000 but they had to pay Rs. 5,600
in total as they were allowed by the supplier to take two months extra credit period on ABC
Limited specific request.
Required:
Record the journal entries.
COST FORMULAS
An entity shall use the same cost formula for all inventories having a similar
Consistency
nature and use to the entity.
Different For inventories with a different nature or use, different cost formulas may be
formulas justified.
The FIFO formula assumes that the items of inventory that were purchased
or produced first are sold first, and consequently the items remaining in
FIFO
inventory at the end of the period are those most recently purchased or
produced.
Under the weighted average cost formula, the cost of each item is
determined from the weighted average of the cost of similar items at the
Weighted beginning of a period and the cost of similar items purchased or produced
Average during the period. The average may be calculated on a periodic basis, or as
each additional shipment is received, depending upon the circumstances of
the entity.
Class Notes
NRV
The practice of writing inventories down below cost to NRV is consistent with
Rationale the view that assets should not be carried in excess of amounts expected to
be realised from their sale or use.
Inventories are usually written down to NRV item by item. It is not appropriate
Item by to write inventories down on the basis of a classification of inventory, for |3
Item example, finished goods, or all the inventories in a particular operating
segment.
Estimates of NRV are based on the most reliable evidence available at the
Estimate time the estimates are made, of the amount the inventories are expected to
realise.
NRV of Materials and other supplies held for use in the production of inventories are
Raw not written down below cost if the finished products in which they will be
Material incorporated are expected to be sold at or above cost.
When there is clear evidence of an increase in NRV because of changed
Reversal of economic circumstances, the amount of the write-down is reversed (i.e. the
write down reversal is limited to the amount of the original write-down) so that the new
carrying amount is the lower of the cost and the revised NRV.
RECOGNITION AS AN EXPENSE
When
The carrying amount of those inventories shall be recognized as an
Inventories are
expense in the period in which the related revenue is recognized.
sold
Write down and
Recognised as an expense in the period the write-down or loss occurs.
losses
Reversal of Recognised as a reduction in the amount of inventories recognized as an
write down expense in the period in which the reversal occurs.
Some inventories may be allocated to other asset accounts, for example,
Allocation to
inventory used as a component of self-constructed property, plant or
other assets
equipment.
QUESTION 03 PE February 2013 Q6(b)

AFP & Co., has inventory on hand at the end of the year on December 31, 2011 as follows:
Production Selling Selling
Material Cost/
Item Units Cost/ Unit Cost/ Unit Price/ Unit
Unit(Rs.)
(Rs.) (Rs.) (Rs.)
Suit Cases 450 165 18 14 184
Hand Bags 330 55 15 12 85
Required:
State at what amount, the inventories will be shown in the financial statements as per the
requirements of IAS-2. (05)
DISCLOSURE
1. the accounting policies adopted in measuring inventories, including the cost formula
used
2. the total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity
3. the amount of inventories recognised as an expense during the period
4. the amount of any write-down of inventories recognised as an expense in the period
5. the amount of any reversal of any write-down that is recognised as a reduction in the
amount of inventories recognised as expense in the period
6. the circumstances or events that led to the reversal of a write-down of inventories
7. the carrying amount of inventories pledged as security for liabilities
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IAS 2 Inventories

COST OF INVENTORIES: GENERAL

The conversion costs are included in inventory on the basis of following

QUESTION 03 PE February 2013 Q6(b)

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