LKAS 02-Inventories SLIIT

BM 3340 – Financial Reporting
LKAS 02 Inventories
Year: 3 – Semester: I
Ms. Thisali Liyanage

2
Financial Reporting
BM3340
Thisali Liyanage
MBA (Colombo), BBA Accounting Sp. First Class (Colombo), CIMA (Passed Finalist)
Lecturer, SLIIT Business School
[email protected]
3
Course Outline 4
Conceptual Framework for Financial Reporting

LKAS 01-Presentation of Financial Statements
LKAS 02-Inventories
SLFRS 13-Fair value

LKAS 12-Income Taxes
LKAS 16-Property Plant and Equipment
SLFRS 17-Leases
LKAS 18-Revenue
SLFRS 10-Consolidated Financial Statements
Corporate Governance
4
Learning Outcomes:
• Identify the objective and the scope of the standard.
• Define the technical terms identified in the standard.
• Detail the practical application of the standard and keep

accounts in the financial statements.
5
Objective of LKAS 02
The objective of this Standard is to prescribe the accounting

treatment for inventories.
6
Scope
This standard applies to all inventories, except:

(a)work in progress arising under construction contracts, including
directly related service contracts (see LKAS 11 Construction
Contracts);
(b)financial instruments (see LKAS 32 Financial Instruments:
Presentation and LKAS 39 Financial Instruments: Recognition and
Measurement); and
(c)biological assets related to agricultural activity and agricultural
produce at the point of harvest (see LKAS 41 Agriculture).
8
Definition-Inventory
The following terms are used in this Standard with the meanings specified:
▶ Inventories are assets:
▶ (a) held for sale in the ordinary course of business (Finished goods);
▶ (b) in the process of production for such sale (Work-In-Progress);or
▶ (c ) in the form of materials or supplies to be consumed in the production
process or in the rendering of services (Raw Material).
9
Measurement of Inventories
▶ Inventories shall be measured at the lower of cost and net realizable value.
Measurement
of Inventories
Cost of Net Realizable

Inventory Value
cost and net realizable value whichever is lower.

10
Cost of Inventory
a) Costs of purchase:
Purchase price
Import duties and other taxes
Transport, handling and other directly attributable costs
Trade discounts, rebates and other similar items (Deductions)
b) Costs of conversion:
Costs directly related to the units of production
ex: direct labour, production overheads (fixed + variable)

Cost of Inventory
c) Other costs:
Costs incurred in bringing the inventories to their present location and

condition
ex: non-production overheads or the costs of designing products for

specific customers
Costs excluded from the cost of inventories
• Abnormal amounts of wasted materials, labour or other production

costs;
• Storage costs, unless those are necessary for the production process
before a further production stage;
• Administrative OHs that do not contribute to bringing inventories to
their present location and condition; and
• Selling costs.
11
Activity 01
▶ Company Y purchased 10 000 units of raw material at Rs.37 per unit

and the following expenses are also incurred following expenses.
▶ Non recoverable taxes Rs. 55 000
▶ Loading and unloading expenses Rs. 7 500
▶ Carriage inwards Rs.4 750
▶ And the trade discount is 2%
Calculate the cost of purchase of the inventory
12
Answer
Purchased cost of the material 37*10 000) 370,000

(-) Trade discount 370000*2% 7,400
Net purchased cost 362,600
Non recoverable taxes 55,000 55,000
Loading and unloading
expenses 7,500 7,500
Carriage inwards 4,750
Cost of Inventory 429,850
15
Activity 02
▶ Company X consumed Rs. 459 000 worth raw material during the
year and incurred Rs. 265 000 as direct labour. In addition, they
incurred variable production overhead of Rs. 176 000. The cost
incurred for the factory rent is Rs. 140 000 and the supervisory
salaries is Rs.100 000. During the year, the company expected
production is 80 000 units and the actual production is 90000
units. Calculate the cost per unit of inventory.
Answer
19
Net Realizable value
▶ NRV of an assets is the money a seller expects to receive for the

sale of an asset after deducting the costs of selling or disposing of
the asset.
21
Activity 03
Lower of cost and

Inventory Item Cost NRV
NRV
1 27,000 32,000 27,000
2 14,000 8,000 8,000
3 43,000 55,000 43,000
4 29,000 40,000 29,000
113,000 135,000 107,000

22
Activity 04
The following figures relate to inventory held at the year end.
Calculate the value and cost of the inventory held.

A B C
Cost 20 9 12
Selling price 30 12 22
Modification to cost to - 2 8
enable sale
Marketing cost 7 2 2
Units held 200 150 300

Answer 04
Recognition as an ‘expense’
25
Cost Formula
▶ Your inventory is mess up!!

▶ How to determine the total inventory cost ?
▶ Use following bases Recommended by
LKAS02
▶ First-In-First-Out Method
▶ Weighted Average Cost method
26
First-In-First-Out Method (FIFO)
▶ The FIFO formula assumes that the items of inventory that were
purchased or produced first are sold first, and consequently the
items remaining in inventory at the end of the period are those
most recently purchased or produced.
27
Weighted Average Cost Method
▶ The periodic weighted average pricing method is similar to the

continuous weighted average pricing method; however, the
unit price is calculated at the end of the period.
▶ This is a similar approach; however, it means that values are not
known until the end of the period.
▶ In our example above, the weighted average price under the
periodic method for May is:
▶ =Total c ost/(opening quantity +Total quantity received)
28
Activity 06
▶ Following information is provided for company Y. Estimate the value of the
inventory under FIFO and WAC methods.
▶ Opening stock 2021.04.1-750 units at Rs.4
▶ Stock purchased
▶ 2021.05.10- 1500 units at Rs.5
▶ 2021.06.18- 500 units at Rs.8
▶ 2022.02.12-2500 units at Rs.7
▶ Stock sold
▶ 2021.06.11 – 875 units
▶ 2021.07.02- 1750 units
▶ 2021.02.18- 1900 units
29
Answer-value of the stock is Rs. 5075 (FIFO)
30
Answer-Value of the stock is Rs. 5025 (WAC)
10500/2250=4.6
10416.67/1875=5.56 7
Date Purchases Sold Balance

Quantity/U Quantity/U Quantity/Uni
nits unit price Value nits unit price Value ts unit price Value
2021.04.01 750 4 3000
2021.05.10 1500 5 7500 2250 4.67 10500
2021.06.11 875 4.67 4083.33 1375 4.67 6416.67
2021.06.18 500 8 4000 1875 5.56 10416.67
2021.07.02 1750 5.56 9722.2 125 5.56 694.44
2022.02.12 2500 7 17500 0 2625 6.93 18194.44
13169.312
2022.02.18 1900 6.93 2 725 6.93 5025.13
31
Disclosures
a) the accounting policies adopted in measuring inventories, including the cost formula used;
(b)the total carrying amount of inventories and the carrying amount in classifications appropriate to
the entity;
(c) the carrying amount of inventories carried at fair value less costs to sell;
(d) the amount of inventories recognized as an expense during the period;
(e)the amount of any write-down of inventories recognized as an expense in the period in
accordance with paragraph 34;
(f)the amount of any reversal of any write-down that is recognized as a reduction in the amount of
inventories recognized as expense in the period in accordance with paragraph 34
(g)the circumstances or events that led to the reversal of a write-down of inventories in accordance
with paragraph 34; and
(h) the carrying amount of inventories pledged as security for liabilities.
32
▶
33
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BM 3340 – Financial Reporting

Ms. Thisali Liyanage

Conceptual Framework for Financial Reporting

SLFRS 13-Fair value

• Identify the objective and the scope of the standard.

• Define the technical terms identified in the standard.

• Detail the practical application of the standard and keep

The objective of this Standard is to prescribe the accounting

This standard applies to all inventories, except:

Cost of Net Realizable

cost and net realizable value whichever is lower.

ex: direct labour, production overheads (fixed + variable)

Costs incurred in bringing the inventories to their present location and

ex: non-production overheads or the costs of designing products for

• Abnormal amounts of wasted materials, labour or other production

▶ Company Y purchased 10 000 units of raw material at Rs.37 per unit

Purchased cost of the material 37*10 000) 370,000

▶ NRV of an assets is the money a seller expects to receive for the

Lower of cost and

1 27,000 32,000 27,000

2 14,000 8,000 8,000

3 43,000 55,000 43,000

4 29,000 40,000 29,000

113,000 135,000 107,000

The following figures relate to inventory held at the year end.

Calculate the value and cost of the inventory held.

Units held 200 150 300

▶ Your inventory is mess up!!

▶ The periodic weighted average pricing method is similar to the

Date Purchases Sold Balance

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