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Inventory
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Introduction
Inventory often accounts for a large proportion
of total assets
Accounting methods used for inventory can have
a significant impact on reported assets and
profits
AASB 102 applies to all inventories except:
work in progress under construction contracts
financial instruments, and
biological assets
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Definition of inventory
Inventories are defined as assets (AASB 102):
held for sale in the ordinary course of business
in the process of production for such sale, or
in the form of materials or supplies to be consumed in
the production process or in the rendering of services
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Standard costs
Predetermined product costs based, for example, on
planned products and/or operations, planned cost and
efficiency levels and expected capacity utilisation
Only permitted for inventory costing where the
standards are realistically attainable, reviewed
regularly and revised where necessary
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Borrowing costs
Costs associated with borrowings (e.g. interest) can
sometimes be included in the cost of inventory
Governed by AASB 123 Borrowing Costs
Interest costs can be included as part of the
inventory to the extent that the inventory is deemed
to be a qualifying asset
Qualifying assets are those that necessarily take a
substantial period of time to get ready for their
intended use or sale
Would not be applicable to most inventory being
produced
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Weighted-average method
An average cost is based on beginning inventory
and items purchased during the period
Various costs of individual units are weighted by
the number of units
Cost of goods sold and ending inventory are
costed at the average cost
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FIFO method
Goods from beginning inventory and the earliest
purchases are assumed to be the goods sold
first
Consistent with selling behaviour in most entities
Ending inventory assumed to be most recent
purchases
More current value of inventory on balance sheet
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LIFO method
Most recent purchases are assumed to be the
first goods sold
Ending inventory assumed to be the oldest
goods
Inventory could be valued at prices paid some years
earlier
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Inventory systems
Determination of cost of sales and inventory
under each cost-flow assumption also depends
on the inventory recording system used
Periodic inventory system
Inventory counted periodically
No continuous records kept of inventory sales
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Disclosure requirements
Where material, AASB 102 requires the
disclosure of the following:
accounting policies for measuring inventories,
including cost formulas used
total carrying amount of inventories
carrying amount of inventories carried at fair value less
costs to sell
amount of inventories expensed during the period
amount of any write-downs expensed in the period
amount of any reversal of any write-down
circumstances leading to reversals of write-downs
carrying amount of inventories pledged as securities
for liabilities
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Summary
The lecture addresses the topic of accounting for
inventory
Under AASB 102, inventory is to be measured at
the lower of cost and net realisable value
Absorption costing and not direct costing should
be applied
To account for the flow of inventory, cost-flow
assumptions are necessary
Allowable methods are specific identification, weightedaverage and first-in first-out
Last-in first-out is not allowed in Australia
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