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Inventory Lecture Notes

This document summarizes accounting for inventory under IAS 2. [1] Inventory includes raw materials, work in progress, and finished goods valued at the lower of cost or net realizable value. [2] Cost is what has been incurred to date while net realizable value is a future estimated selling price less completion and sale costs. [3] Closing inventory is recorded on the statement of financial position as a current asset and removed from cost of sales on the statement of profit or loss.

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Minh Thư
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130 views9 pages

Inventory Lecture Notes

This document summarizes accounting for inventory under IAS 2. [1] Inventory includes raw materials, work in progress, and finished goods valued at the lower of cost or net realizable value. [2] Cost is what has been incurred to date while net realizable value is a future estimated selling price less completion and sale costs. [3] Closing inventory is recorded on the statement of financial position as a current asset and removed from cost of sales on the statement of profit or loss.

Uploaded by

Minh Thư
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Inventory (IAS 2)

1.Basic’s
o Accounting for Inventory is governed by International
Accounting Standard 2 “Inventory”

Raw Materials

o Inventory Work In Progress

Finished Goods

o Inventory is valued at the lower of cost & Net


Realisable Value
Cost of Purchase

Cost Cost of Conversion

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NRV: - Estimated Selling Price less:
- Estimated Costs to Completion and
- Estimated Costs necessary to Make the Sale (i.e.
Trade Discounts, Marketing, Distribution
Learning Point: “COST” is what has been incurred to date

“NRV” is a future estimate

This is why cost to complete is deducted within NRV

o Journal for Closing Inventory


Dr Inventory (As a Current Asset in SOFP) X
Cr Cost of Sales (i.e. Closing Inventory) X
Being Closing Inventory
o Closing Inventory affects both the SOPL and SOFP
o Because closing inventory is unsold, it is not a cost of
sale, so hence it is credited to Cost of Sales (Expense
decreasing)

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o Format of Cost Of Sales Account/Cost of Goods Sold
Opening X
Inventory
Add: Purchases X
Less: Purchases (x)
Returns
Add: Carriage In X
Less: Closing (x)
Inventory
Cost of Sales X

“ Match Sales for a given period, with the Cost Incurred in


Generating Those Sales “ – this is why closing inventory is
deducted within Cost of Sales i.e. it is unsold – Application of
Accruals/Matching Concept
o Figure for Closing Inventory will be obtained from an In
ventory Count/Stocktake

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2.Methods of Valuing Inventory

o A stocktake will determine the quantity of unsold


inventory at year end
o The methods listed below will determine the cost
valuation to be place on the closing inventory

 FIFO (First In First Out) – assumes that the first items of


inventory received are the first items to be sold
o FIFO helps to ensure the business does not incur
obsolescence costs i.e. by getting rid of the oldest
inventory first

 AVCO – (Average Cost of Inventory Held)


o With each receipt of goods, the average cost for each
item of Inventory is recalculated.
o Further issues of goods are then at that figure, until
another receipt of goods means that another
recalculation is needed.
o LIFO - (Last In, First Out)
o Not permitted by IAS 2

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3.Other Matters

o If there is damaged inventory included in the Closing


Inventory figure, then the damaged inventory should be
accounted for at the lower of Cost & NRV –
o Goods issued on “sale or return basis” should not be
included as sales and should instead be included in Year
End Inventory –

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IN CLASS QUESTIONS TO PRACTICE

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