Ias 2 Questions and Answers
Ias 2 Questions and Answers
Ias 2 Questions and Answers
1. Prepare brief notes for a company board meeting to answer the following points for the
directors:
(b) State which costs should be included when measuring the value of inventories
(c) State which costs should NOT be included when measuring the value of inventories.
Answer
(a) Inventories are assets held for sale in the ordinary course of business. Companies
often have inventories in various forms:
raw materials, for use in a manufacturing business
work-in-progress (partly manufactured goods)
finished goods, made by the business and ready for resale to customers
finished goods, which have been bought in by the business for resale
(b) Costs should include the following:
costs of purchase (including taxes, transport and handling) net of trade
discounts
costs of conversion (including fixed and variable overheads)
other costs incurred in bringing the inventories to their present location and
condition
(c) Inventory costs should not include:
abnormal waste
storage costs
administrative overheads not related to production
selling costs
interest cost when inventories are purchased with deferred settlement terms
2. A company has carried out its stock take at the end of its financial year. Included in its
inventories are the following items:
(a) A table that cost the company £1,250. This type of table usually sells for £1,895 but it
was damaged in a flood and will therefore be sold at a significant discount. It is
expected to sell for £450
(b) A wardrobe that cost the company £720 and normally sells for £995. The wardrobe
has been damaged and will cost approximately £120 to repair at which point it can be
sold for £750
(c) A dresser that was made to a customer’s own specifications and cost the company
£1,832 to make. Unfortunately, the customer went bankrupt and could not purchase
the item. Due to the unusual design the dresser was not easy to sell. After the year-
end however, the company sold the dresser for £2,250 but incurred commission
costs on the sale of £105 and delivery costs of £158
State the value that each of the above items will be included at in the company’s year-
end inventory
Answers: Each item should be valued at the lower of cost and net realisable value
3. A company holds three distinct types of inventory in its warehouse at the end of its
financial year. These are valued as follows:
Task
Draft a letter to Ms Ogier justifying any adjustments you have made to:
the inventories valuation on 30 September 20-9
the balances in the trial balance as a result of her taking items from the company for
personal use or for gifts to friends
Your explanation should make reference, where relevant, to accounting concepts and
applicable accounting standards.
Dear Ms Ogier
Re: Ogier Perfumes Limited
I am writing to you to explain some of the adjustments that I have made to the
balances in the company accounts at 30 September 20-9.
The first adjustment is to the figure for inventories which was valued at cost at
£49,477. It is necessary to adjust the figure for inventories at the close of business on
30 September. The valuation of £49,477 includes items which had cost £8,200, but
which could now be sold for only £4,800.
IAS 2, Inventories, requires that inventories be valued at cost, or, if lower, at net
realisable value. As the net realisable value is lower than cost, these items must be
included in the financial statements at their net realisable value of £4,800. Hence, the
total value of inventories in the financial statements should be £46,077.
The second adjustment is to the purchases figure in the trial balance. Under the
business entity concept, the financial statements record and report on the activities of
the entity and must not include personal transactions of those who play a part in
owning or running the entity. As some of the purchases were used for personal use
they cannot be classed as expenses of the company. Hence, they must be deducted
from purchases and treated as part of your director’s emoluments from the company.
If you have any questions relating to these adjustments do not hesitate to contact me.
Yours sincerely
Accounting Technician