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    Inventory Lecture Notes

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    Minh Thư
    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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    Inventory Lecture Notes

    Uploaded by

    Minh Thư
    82 views9 pages
    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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    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.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    82 views9 pages

    Inventory Lecture Notes

    Uploaded by

    Minh Thư
    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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    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

    1
    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)

    2
    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

    3
    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

    4
    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 –

    5
    IN CLASS QUESTIONS TO PRACTICE

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