Summary of IAS 12- Inventory
Copyright @ Phnom Penh HR
(Phnom Penh HR : Recruitment / Consulting / Training)
Prepared by Mr. Yan Nang, ACCA, MBA, Tax Agent...
This is internal document for training IAS / IFRS @ https://phnompenhhr.com/
I.
Definition ..................................................................................................................... 2
II. The cost of inventories ................................................................................................ 2
III.
Cost formulas ........................................................................................................... 3
IV.
Measurement ............................................................................................................ 4
V. Cost of goods sold /Expense recognition .................................................................... 5
VI.
Impairment (Write-down to net realisable value) .................................................... 5
VII.
Examples .................................................................................................................. 6
7.1.
Example 1 – Inventory (cost) ............................................................................... 6
7.2.
Example 2 – Inventory (valuation)....................................................................... 7
7.3.
Example 3- cost of inventory ............................................................................... 7
7.4.
Example 4 – Cost of Inventories- ABC Trading Company ................................. 8
7.5.
Example 5 – Net Realizable Value (NRV) .......................................................... 9
7.6.
Example 6 – Net Realizable Value - Company ABC Inc. ................................. 10
7.7.
Example 7 – FIFO .............................................................................................. 10
7.8.
Example 8 – AVCO ........................................................................................... 10
7.9.
Example 9 – Subsequent Measurement of Inventory........................................ 11
7.10.
Example 10 – Materials and Subsequent Measurement of Inventory ............ 11
7.11.
Example 11 – Subsequent Measurement of Products X, Y and Z ................ 11
7.12.
Example 12 – Subsequent Measurement of Inventory-Warehouse of X-Pro 12
7.13.
Example 13 – Recovery of Inventory Loss .................................................... 12
7.14.
Example 14- cost of goods sold ...................................................................... 13
7.15.
Example 15- Hurricane ................................................................................... 13
7.16.
More Examples…. .......................................................................................... 13
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IAS 2 Inventories
I. Definition
IAS 2 defines inventories as assets which are:



held for sale in the ordinary course of business ( finished goods,
merchandise),
in the process of production for such sale ( work in process/ work in
progress / WIP), or
in the form of materials or supplies to be consumed in the production
or rendering of services.
II. The cost of inventories = Purchase cost + conversion cost +
other cost = material + labor + overhead ( in practice)
Cost should include all:



costs of purchase (including taxes / refundable tax, transport, and
handling) net of trade discounts received : insurance, clearance cost..
costs of conversion (including fixed and variable manufacturing
overheads) and : convert direct material to finished goods = DL + IDM
+ IDL + other overhead = DL + production overhead
other costs incurred in bringing the inventories to their present
location and condition (e.g specific design)
IAS 23 Borrowing Costs identifies some limited circumstances where borrowing
costs (interest) can be included in cost of inventories that meet the definition of a
qualifying asset.
Inventory cost should not include:






abnormal waste ( material, labour, overhead)
storage costs ( e.g rental for finished goods, but rental for raw
material=> cost of inventory)
administrative overheads unrelated to production
selling costs ( e.g commission)
foreign exchange differences arising directly on the recent acquisition
of inventories invoiced in a foreign currency
interest cost when inventories are purchased with deferred
settlement terms.
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
Cash / settlement discount received : other income if customer
Dr. Inventory………..1000
Cr. AP…………………………….1000
paid:
Dr. AP………………….1,000
Cr. Discount received……..100
Cr. Cash………………………….900
Trad discount
Dr. Purchase………..1000 ( if not use net purchase)
Cr. AP………………………………………….900
Cr. Purchase discount……………………..100
Net purchase = gross purchase – purchase return and allowance – purchase
discount
Discount allowed:
Dr. AR……………1000
Cr. Sale………………………….1000
Paid
Dr. Cash………………..…900
Dr. Discount allowed..100
Cr. AR……………………………………1000
III.
Cost formulas
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IAS 2 allows for two methods of costing, the standard technique and the retail
technique. The standard cost and retail methods may be used for the measurement
of cost, provided that the results approximate actual cost.
Sale – cost of goods sold = gross profit=> cost of goods sold = sale - gross profit
For inventory items that are not interchangeable, specific costs are attributed to the
specific individual items of inventory.
For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost
formulas. The LIFO formula, which had been allowed prior to the 2003 revision of
IAS 2, is no longer allowed.
The same cost formula should be used for all inventories with similar characteristics
as to their nature and use to the entity. For groups of inventories that have different
characteristics, different cost formulas may be justified.
IV.
Measurement
Inventories are required to be stated at the lower of cost and net realisable value
(NRV). 1000$ vs 900$=> inventory in balance sheet = 900$=> 1,100
Dr. Loss (NRV)…….100
Cr. Inventory……………..100
 Reverse
Dr. Inventory…..100
Cr. Loss(NRV)………100
Recovery ( 1100-900=200 but reverse $100)
NRV is the estimated selling price in the ordinary course of business, less the
estimated cost of completion and the estimated costs necessary to make the sale.
NRV= selling price – cost of completion – cost to sale
= 1,200 -100-(120+80)=900$
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V. Cost of goods sold /Expense recognition
When inventories are sold and revenue is recognised, the carrying amount of those
inventories is recognised as an expense (often called cost-of-goods-sold).
Any write-down to NRV and any inventory losses are also recognised as an expense
when they occur.
VI.
Impairment (Write-down to net realisable value)
Inventories are usually written down to NRV on an item by item basis, unless it is
more appropriate to group similar or related items.
Write-downs to NRV are recognised as an expense in the period the loss occurs.
Reversals arising from an increase in NRV are recognised as a reduction of the
inventory expense in the period in which they occur.
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VII. Examples
7.1.
Example 1 – Inventory (cost)
According to IAS 2 Inventories, which TWO of the following costs should be included
in valuing the inventories of a manufacturing company?
1. Carriage inwards
2. Carriage outwards
3. Depreciation of factory plant
4. General administrative overheads
A 1 and 4
B 1 and 3
C 3 and 4
D 2 and 3
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7.2.
Example 2 – Inventory (valuation)
Neil paid $3 per unit for the raw materials of its products. To complete each unit
incurred $2 per unit in direct labour.
Production overheads for the year based on normal output of 12,000 units was
$72,000.
Due to industrial action only 10,000 units were produced and 1,000 units were in
inventory at the end of the year.
As a result of the industrial action some units were badly stored and became
damaged. It’s is estimated that 200 of the units will now only be sold for $12 each
after minor repairs of $2 each
What figure for closing inventory would be shown in the Statement of
Financial Position?
Loss for NRV = (11-10) x 200 units = $200
7.3.
Example 3- cost of inventory
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What is the ‘cost'
7.4.
Example 4 – Cost of Inventories- ABC Trading Company
ABC Trading Company purchases motorbikes from several countries and sells them
to European countries. During the current year, this company has incurred
following expenses:
1. Trade discounts on purchase
2. Handling costs relating to imports
3. Salaries of accounting department
4. Sales commission paid to sales agents
5. After sales warranty costs
6. Import duties
7. Costs of purchases (based on supplier’s invoices)
8. Freight expense
9. Insurance of purchases
10. Brokerage commission paid to indenting agents
Requirement:
ABC Trading Company seeks your advice on which costs are allowed by IAS 2 for
inclusion in the cost of inventory.
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7.5.
Example 5 – Net Realizable Value (NRV)
Calculate the net realizable value of inventory having following particulars:
Total Units
19,000
Estimated Selling Price per Unit
35
Units Damaged (Included in Total Units)
700
Cost to Repair each Damaged Unit
$6
Other Selling Costs per Unit
$2
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7.6.
Example 6 – Net Realizable Value - Company ABC Inc.
Company ABC Inc. is selling the part of its inventory to Company XYZ Inc. For
reporting purposes, ABC Inc. is willing to determine the net realizable value of the
inventory that will be sold.
The expected selling price of the inventory is $5,000. However, ABC Inc. needs to
spend $800 to complete the goods and an additional $200 for transportation
expenses. Considering the available information, calculate the net realizable value of
the inventory .
7.7.
Example 7 – FIFO
Use the following information to calculate the value of inventory on hand on Mar 31
and cost of goods sold during March in FIFO periodic inventory system and under
FIFO perpetual inventory system.
Mar 1
5
9
11
16
20
29
7.8.
Beginning Inventory
Purchase
Sale
Purchase
Purchase
Sale
Sale
68 units @ $15.00 per unit
140 units @ $15.50 per unit
94 units @ $19.00 per unit
40 units @ $16.00 per unit
78 units @ $16.50 per unit
116 units @ $19.50 per unit
62 units @ $21.00 per unit
Example 8 – AVCO
Apply AVCO method of inventory valuation on the following information, first in
periodic inventory system and then in perpetual inventory system to determine the
value of inventory on hand on Mar 31 and cost of goods sold during March.
Mar 1
5
14
27
29
Beginning Inventory
Purchase
Sale
Purchase
Sale
60 units @ $15.00 per unit
140 units @ $15.50 per unit
190 units @ $19.00 per unit
70 units @ $16.00 per unit
30 units @ $19.50 per unit
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7.9.
Example 9 – Subsequent Measurement of Inventory
Amit buys machines, which he repairs and then sells. He has the following
information about a machine which is being repaired at 30 November:
What is the inventory value of the machine in Amit’s statement of financial position
at 30 November?
7.10. Example 10 – Materials and Subsequent Measurement of
Inventory
Value the following items of inventory:
a) Materials costing $12,000 bought for processing and assembly for a
profitable special order. Since buying these items, the cost price has fallen to
$10,000.
b) Equipment constructed for a customer for an agreed price of $18,000. This
has recently been completed at a cost of $16,800. It has now been discovered
that, in order to meet certain regulations, conversion with an extra cost of
$4,200 will be required. The customer has accepted partial responsibility and
agreed to meet half the extra cost
What is the inventory value in statement of financial position?
7.11. Example 11 – Subsequent Measurement of Products X, Y and Z
ABC Company sells three products X, Y and Z. The following information was
available at the year-end:
What is the value of the closing inventory?
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7.12. Example 12 – Subsequent Measurement of Inventory-Warehouse
of X-Pro
By the end of the year entity had 100 units in warehouse of X-Pro. Units are so far
reported at total cost of 10,000.
Recently fire broke out and damaged the outer casing of units. Engineers have
confirmed that product can still fetch full selling price if outer cover is replaced.
Currently X-Pro is selling for $110 per unit and cost of repair is estimated to be $5
per unit. Additionally, entity will have to pay $2,000 in total towards the carriage
cost to move repaired goods from workshop to warehouse.
Compute the value at which inventory should be reported in financial statements if
Lower of Cost and NRV(LCNRV) rule is followed?
7.13. Example 13 – Recovery of Inventory Loss
Ultar Inc. makes miniature models of Karakoram peaks for tourists. Cost of year-end
inventory is 7,388. Last year, sales in southern market were not promising thus
entity had to write down the inventory to then prevailing NRV of 5,300.
This year however, NRV has risen and determined at 8,500.
Give the journal entry to record the recovery of write-down loss.
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7.14. Example 14- cost of goods sold
At the beginning of the financial year a business has $1,500 of inventory left over
from the preceding accounting period. During the year they purchase additional
goods costing $21,000 and make sales totaling $25,000. At the end of the year there
are $3,000 of goods left that have not been sold.
Prepare extracts of income statement and statement of financial position.
Sample of extract of income statement :
$
Revenue
$
x
Opening Inventory
X
Purchases
X
Less: Closing Inventory
(x)
Cost of Sales/cost of goods sold
(x)
Gross Profit
x
7.15. Example 15- Hurricane
Hurricane, an entity, has 1,500 units of product Y at 30 June 20X8. The product had
been purchased at a cost of $30 per unit and normally sells for $40 per unit.
Recently, product Y started to deteriorate and can now be sold for only $38 per unit,
provided that some rectification work is undertaken at a cost of $10 per unit.
What was the value of inventory at 30 June 20X8?
7.16. More Examples….
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