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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 Less Closing inventory Cost of Sales GROSS PROFIT 2,000 1,500 3,500 1,200 2,300 7,700 10,000
If a company could manipulate the value of closing inventory, it could influence profit figures and tax liabilities Different types of inventory require different treatments. Eg specialist products, custom built items, products that mature in value over time, products that are work in progress etc IAS 2 was introduced to provide clarity
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.
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
Measurement
1. 2. 3. 4. 5. Actual unit cost FIFO Weighted average costs Standard cost 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 highvalued, 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.
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 Cr
21,000
21,000
Q3
The following costs cannot be included as part of the cost of inventory:
Selling costs
Q4
Journal + receivables 55,000 + sales 50,000 + VAT 5,000 Receivables Sales VAT Journal + Expense 45,000 - CA inventory 45,000 Inventory Expense (P&L) Inventory (SFP) Dr 45,000 45,000 Dr 55,000 50,000 5,000 Cr Cr
Q5
Write down 300,000 Journal Inventory expenses (P&L) Inventory (SFP) Dr 300,000 300,000 Cr
Being the write down of stock destroyed in fire 300,000 x 50% = 150,000 Insurance receivable CA Recoverable value Journal Insurance Compensation Receivable (SFP) Compensation receivable (SPL) Dr 150,000 Cr
150,000
Q6
Journal + receivables 50 x 280 + sales 50 x 280 Receivables Sales Dr 14,000 14,000 Cr
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 Inventory expense (P&L) Inventory (SFP) Being the write down of inventory to NRV Dr 29,000 29,000 Cr
Q7
NRV Selling Price Sales & Marketing Delivery to customer NRV P 150 (15) (21) 114 Q 295 (18) (40) 237
Q9
Week Open Week 1 Bought Qty 140 140 10 13 1,820 Balance 1,400 3,220
Week 2
Used
-195
140 x 10 55 x 13
1400 715
2115 1105 1985 880 1105 165 1270 715
Week 3 Week 4
Bought Used
80 -100
11 85 x 13 15 x 11
Balance AVCO (140 * 10) + (140 * 13) 280 (85*11.50) + (80*11) 160 11.61 11.50
(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
NRV 15,000 Selling Price 20,000 Less Marketing Costs 10,000 1 table 5,000 50 x 225 10,000 5,000 6,500 130 250 25 225 11,250
50 x 130
6,500