CHAPTER 5:

IAS 2 -
INVENTORIES
TON DUC THANG UNIVERSITY
 Content
1. Objective
2. Scope
3. Definition
4. Measurement of
inventory
5. Cost formula
7. Recognized as
expense
8. Disclosure
 I. OBJECTIVES

• Prescribe the accounting treatment for inventories

1

• Provides guidance for determining the cost of

2 inventories
• Provides guidance for determining for subsequently
3 recognising an expense

• Write-down to net realisable value

4
 II. SCOPE
Applies to all inventory,
except:
• Work In Progress (WIP) under construction/service contracts (IAS
1 11 Construction Contracts)

• Financial instruments (IAS 32, IFRS 9, IAS 39)

2

• Agricultural/forest products, mineral ores, agricultural produce

3 measured at net realizable value

• Biological assets related to agricultural activity (IAS 41 Agriculture)

4

• Commodity broker-traders measuring inventories at fair value less

5 costs to sell
 II. DEFINITION
Inventories are assets:

Held for sales in the In the process of In the form of materials

ordinary course of production for such and supplies to be
business sale consumed in the
production process or in
the rendering of services
 II. DEFINITION
Question: Whether it is inventories or not????
◦Ex1: An entity trades in commercial property (ie it buys
commercial property with a view to selling it at a profit in the
near term).
◦Ex2: An entity holds lubricants that are consumed by the
entity’s machinery in producing goods.
◦Ex3: An entity holds a building to earn rentals under
operating leases from independent third parties.
◦Ex4: An entity that manufactures chemicals maintains its
manufacturing plant using a specially designed (bespoke)
cleaning machine acquired from a local store. The machine is
expected to be used by the entity for many years.
 II. DEFINITION
Question:
Where, if at all, should the following items be classified on a statement of
financial position?
(a) Goods out on approval to customers
(b)Goods in transit that were recently purchased FOB destination
(c) Land held by a real estate firm for sale
(d)Raw materials
(e) Goods received on consignment
(f) Stationery supplies
• Notes:
(a) Customers do not receive the goods
(b) The company is the buyer
(e) The company is the consignee
III. MEASUREMENT OF
INVENTORY

LOWER
 III. MEASUREMENT OF
INVENTORY

Cost of inventory = costs of purchase + costs of conversion + other costs.

◦ Costs of purchase = purchase price + import duties + other taxes (non-refundable in
nature) + other direct costs (transport and handling) - Trade volume rebates
◦ Costs of conversion = direct costs + indirect costs (allocated production overheads).
◦ Other costs (eg: specific design expenses incurred in producing goods for individual
customers)
 Scenario 1:
Speedway Auto Manufacturers
Date: 21 March 2011
Title: Additional costs—breakdown

+ Purchase price € 60,000

+ Shipping costs € 400
+ Import duties € 1,000
+ Consumption taxes € 900
+ Transportation costs to the warehouse € 300

* Notes: 2% reduction as a trade discount

Require: Calculate cost of the asset?
 Scenario 2:

A retailer buys a good priced at CU500 per unit. However, the

supplier awards the retailer a 20 percent discount on orders of
100 units or more. The retailer buys 100 units in a single order.
Require: Compute the cost of goods?
 Scenario 3:

A retailer buys a good priced at CU500 per unit. However, the supplier
awards the retailer a 20 per cent discount on orders of 100 units or more.
Furthermore, when the retailer has purchased 1,000 or more units in a
calendar year, the supplier awards the retailer a further volume discount
of 10 per cent of the list price. The additional volume discount applies to
all units acquired by the retailer during the calendar year.
On 1 January 20X1 the retailer buys 1,000 units from the supplier in a
single order.
Require: Compute the cost of goods?
 Scenario 4:

Entity E purchases merchandise on Nov 01, 01. Delivery takes place on

the same day. In the case of (normal) deferred settlement terms of one
month, the purchase price would be CU 200. However, E and its supplier
stipulate that payment has to be made on Nov 30, 02, but at an amount
of CU 212 (CU 200 plus interest of 6% for one year).

Require:
a. Calculate the value of inventory?
b. Journalize the transactions, using the accounts as follows:
+ Merchandise inventory
+ Trade payable
+ Interest expense
 Scenario 5:

Accurate Laser-Guided Farm Implements, Inc. purchases lasers, a

component that it uses in manufacturing its signature product. The
company typically receives delivery of all its component parts and uses
them in manufacturing its finished products during the fall and early
winter, and then sells its stock of finished goods in the late winter and
spring. The supplier invoice for a January delivery of lasers includes the
following line items:
Lasers €5,043
Shipping and handling 125
Shipping insurance 48
Sales tax (refundable tax) 193
Total €5,409
Require: Compute the cost of lasers?
 Scenario 6: APPLYING THE LOWER OF COST AND
NRV RULE
Inventory held by Vaasa Ltd as of 30 June 2013
Item Quantity Cost per Estimated Cost of
number unit selling completion
price and
disposal
A1458 600 2.3 3.75 0.49
A1965 815 3.4 3.5 0.55
B6730 749 7.34 10 0.95
D0943 98 1.23 1 0.12
G8123 156 3.56 5.7 0.67
W2167 1,492 6.12 7.66 0.36
Require:
a. Calculate the value of inventory on hand at 30 June 2013
b. Journalize the transaction
IV. Cost formula
 IV. Cost formula
Question 1: Perpetual system
ABC Company sells a snowboard. During this month, it has the data as
follows: Date Explanation Units Unit Cost
1st September Opening balance 23 units $ 97/unit
12nd September Purchases 45 units $ 102/unit
19th September Purchases 20 units $ 104/unit
26th September Issues 40 units ???
27th September Purchases 44 units $ 105/unit
If company uses FIFO method, compute:

a.1 The cost of units issued on 26th September

a.2 The value of ending inventory

a.3. The gross profit if the selling price is $ 200/unit

 IV. Cost formula
Question 1:
The cost of inventory on hand at 1 January 2013 was $25 000 and at 31

December 2013 was $35 000. Inventory purchases for the year

amounted to $160 000, freight outwards expense was $500, and

purchase returns were $1400.

Require:

What was the cost of sales for the year ended 31 December 2013?
 IV. Cost formula
Question 2:
The following inventory information relates to K Rauma, who uses a
periodic inventory system and rounds the average unit cost to the
nearest dollar:
+ Beginning inventory 10 units @ average cost of $25 each
+ January purchase 10 units @ $24 each
+ July purchase 39 units @ $26 each
+ October purchase 20 units @ $24 each
What is the cost of ending inventory using the weighted average costing
method?
 IV. Cost formula
Question 3:
Malmo Ltd’s inventory transactions for April 2014 are shown below.

If Malmo Ltd uses the perpetual inventory system with the moving
average cost flow method, the 18 April sale would be costed at what
unit cost?
 IV. Cost formula
Malmo Ltd’s inventory transactions for April 2014 are shown belo
Question
4:

If Malmo Ltd uses the periodic inventory system with the FIFO cost flow
method, what would be the cost of sales for April?
 V. Recognition as
expense
• Recognize sold inventories as an expense in the
1 revenue period.

• Recognize inventory losses and write-downs as

2 expenses when they occur.

• Reduce inventory expenses for write-down reversals in

3 the reversal period.
 VI. Disclosure
The following shall be disclosed in the
financial statements

• The accounting policies for inventories.

1

• the total carrying amount of inventories and the carrying amount in

2 classifications appropriate to the entity

• The carrying amount of inventories carried at fair value less costs to sell
3

• The amount of inventories recognised as an expense during the period

4
 Summary
1. Definition
Inventories are assets:

Held for sales in the In the process of In the form of materials

ordinary course of production for such and supplies to be
business sale consumed in the
production process or in
the rendering of services
 Summary
2. Measurement of Inventory

Lower
 Summary
3. Cost formula
+ Specific identification
+ FIFO
+ LIFO: is prohibited
+ Weighted average
 Homework 1:
Learning material [1]: Reading chapter 6 before going to class
Learning material [2]: Reading chapter 6 before going to class
 Homework 2:
Q1. Which of the following are accounted for under IAS 2?
a. The cows of a cattle farmer
b. The gold mineral reserves of a mining company
c. WIP of a long-term construction contract

SCOPE d. Maturing wine in the cellars of a wine producer

e. Clothing in the warehouse of a retailer
f. Lumber of a wood distributor
 Homework 2:
Q2. Lumberjacks plc regularly rents some of its
equipment to its customers. Should Lumberjacks
classify this equipment as inventory?

Yes, because the customer has the ability to use the

DEFINITI equipment.
ON OF
No, because the equipment is rented and not sold.
INVENTO Lumberjacks still owns the equipment.
RY
 Homework 2
Q3. Which of the following items cannot be
included in the cost of inventories?
Variable production overheads

MEASUREME The cost of abnormal wastage of materials

NT OF and labour

INVENTORY Fixed production overheads

Irrecoverable import duties payable on the
acquisition of inventories
 Homework 2
4. Which of the following items should be
included in the cost of inventories?
The cost of abnormal wastage of materials and
labour
MEASUREME
Selling costs
NT OF
The cost of storing finished goods
INVENTORY
Conversion costs
 Homework 2
Question 5
In Nov 01, entity E decided to start producing
product P in 02. Production of P requires raw
material R, which is incorporated in P. Thus, E
MEASUREME
purchased 100 units of R in Nov 01. The costs of
NT OF
purchase were CU 12 per unit. Settlement in cash
INVENTORY
and delivery took place in Nov 01. E expects that
the costs of conversion for one unit of P will be
CU 20.
 Homework 2:
Question 5 (continue)
On Dec 31, 01, the costs of purchase of R have
decreased to CU 7 per unit. These replacement
costs are the best available measure of R’s net
MEASUREME
realizable value. Due to the decrease in the price
NT OF
of R, E expects that it will be able to sell P for
INVENTORY
only CU 18.
Required:
Prepare any necessary entries in E’s financial
statements as at Dec 31, 01.
 Question 6
At the beginning of Week 10 there were 400 units of
component X held in the stores. 160 of these components had
been purchased for £5.55 each in Week 9 and 240 had been
purchased for £5.91 each in Week 8.
COST On day 3 of Week 10 a further 120 components were received
FORMUL into stores at a purchase cost of £5.96 each.
A The only issue of component X occurred on day 4 of Week 10,
when 150 units were issued to production.
Requirement
Using the FIFO valuation method, what was the value of the
closing inventory of component X at the end of Week 10?