Inventories IAS 2 LACPA IFRS Presentation. 2 Overview of session 1. Introduction – definitions 3....
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Transcript of Inventories IAS 2 LACPA IFRS Presentation. 2 Overview of session 1. Introduction – definitions 3....
InventoriesIAS 2
LACPA IFRS Presentation
2
Overview of session
1. Introduction – definitions
3. Recognition
4. Disclosure
5. Questions
2. Measurement
Inventories
1. Introduction – definitions
4
Definitions
Inventories are assets:
a) held for sale in the ordinary course of business;
a) in the process of production for such sale; or
a) in the form of materials or supplies to be consumed in the production
process or in the rendering of services
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Inventories
2. Measurement
6
Measurement
Inventories are stated at the lower of cost of and net realisable value.
7
Cost
Cost of Purchase
OtherCosts
Cost of Conversion
Cost of Production:
8
Cost components
• Cost of purchase comprises
i. purchase price
ii. import duties
iii. transport and handling costs
iv. any other directly attributable costs
v. less trade discounts, rebates and subsidies
vi. may include foreign exchange differences, which arise directly on acquisition of inventories invoiced in a foreign currency (refer IAS 21)
9
Cost components
• Cost of conversion comprises:
i. Costs, which are specifically attributable to units of production, that is direct labour, direct expenses and sub-contracted work.
ii. Production overheads: overheads incurred in respect of materials, labour or services for production, based on the normal level of activity, taking one year with another.
10
Cost components
• Other costs may include overheads, attributable in the particular circumstances of the business to bringing the product or service to its present location and condition, e.g. design costs.
• Excluded costs: Usually selling expenses, general administrative overheads, research and development costs and interest costs are not considered to relate to putting the inventories in their present location and condition.
11
Cost Formulae
• Specify the components attributable to the cost of inventory
• Cost formulae:
– First in First Out (FIFO) formula
– Weighted Average Cost formula
• Prohibited Treatment:
– Last in First Out (LIFO) formula
• Consistency required across each type of inventory:
12
Cost Formulae
• FIFO: the calculation of the cost of inventories on the basis that quantities on hand represent the latest purchases or production. This method assumes that the oldest inventories are used up first.
• Weighted average cost: the calculation of inventories by using an average price computed by dividing the total cost of units by the total number of such items.
• An entity needs to use the same cost formula for all inventories of a similar nature and use to the entity
13
Cost components
Which of the above cost categories do the following costs belong to?
Cost Cost Category
Selling costs
Direct labour
Design of finished goods
Import duties on raw material
Fixed production overhead
Purchase of raw material
Abnormal amounts of wasted material
14
Cost components
Answer
Cost Cost Category
Selling costs Excluded
Direct labour Cost of conversion
Design of finished goods Other costs
Import duties on raw material Cost of purchase
Fixed production overhead Cost of conversion
Purchase of raw material Cost of purchase
Abnormal amounts of wasted material Excluded
15
Cost Formulae
Question: ABC trades in chocolates and made the following purchases and sales in the period. There are 10 units left at balance sheet date. Calculate the cost of stock using FIFO and weighted average cost formulae
Transaction Period Quantity Price Total WAC
Purchase June 3 units $ 20 $ 60
Purchase July 7 units $ 30 $ 210
Sale August 4 units
Purchase September 4 units $ 40 $160
16
Cost Formulae
Answer:FIFO: 4 at $40 plus 6 at $30 = 160 plus 180 = $ 340
Weighted average:
Transaction Period Quantity Price Total WAC
Purchase June 3 units $20 $60
Purchase July 7 units $30 $210
Remaining 10 units $270 $27.0
Sale August 4 units $27.0
Remaining 6 units $162 $27.0
Purchase September 4 units $ 40 $160
Remaining 10 units $322 $32.2
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Net realisable value
Selling Price X
Trade Discounts (X)
Costs to Completion (X)
Marketing, Selling and Distribution Costs (X)
Net Realisable Value X
Net Realisable Value
The estimated selling price in the ordinary course of business less
the estimated costs of completion and estimated costs
necessary to make the sale
Measured at lower of : Cost and Net Realisable Value
18
Cost vs. NRV calculation
A B C
Cost 20 9 12
Selling price 30 12 22
Modification cost to enable sale - 2 8
Marketing costs 7 2 2
Units held 200 150 300
A B C Total
Cost 20 9 12
NRV 23 8 12
Valuation 20 8 12
Quantity 200 150 300
Total value 4,000 1,200 3,600 8800
Item
Item
Inventories
3. Recognition
20
Recognition
• Inventory is a current asset
• Inventory is expensed……when the related revenue is recognised
• The expense of a write down to NRV is recognised……when the write down occurs
What are the Dr and Cr involved in a sale of inventory?
21
Recognition
• Inventory:
Dr Cost of Sales 100
Cr Inventory 100
• Sale:
Dr Cash 150
Cr Sales 150
• Write-down to NRV
Dr Profit and Loss – Inventory write down
Cr Inventory
Inventories
4. Disclosures
23
Disclosures
• Accounting policy
• Balance Sheet
• Income Statement
24
Disclosures
• Accounting policy:
– identify cost formula used (FIFO or weighted average)
– Cost components
– Valuation (lower of cost or NRV)
• Balance Sheet
– Carrying amount of inventories (on face of BS)
– Analyse inventories by classification (e.g. raw materials, finished goods etc…)
• Income Statement
– Cost of inventories expensed in period
– Expense of inventory write-downs included under other operating expenses
Inventories
5. Questions