THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF SRI LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE 2014/2015
Principles of Financial and Cost Accounting
Thilanka Warnakulasooriya
B.Com Special (Col), ACA, MBA Fin ( Col)
LKAS 2
INVENTORIES
LKAS 2 - Objective and Scope

What costs are recognized as inventory costs and when
these costs are transferred to the income statement as
expense

But excludes construction work-in-progress, inventories
of financial instruments, and biological inventory assets
related to agricultural activity and agricultural products
at the point of harvest
3
DEFINITIONS OF KEY TERMS

Inventory.
An asset that is
1. Held for sale in the normal course of business
 2. In the process of production for such sale
 3. In the form of materials or supplies to be used in the
production process or in the rendering of services


Net realizable value. The estimated selling price in the
normal course of business less estimated cost to
complete and estimated cost to make a sale.

MEASUREMENT OF INVENTORIES
Inventories are measured at the lower of cost and net
realizable value (LC and NRV)
LC and NRV example:
 Cost
 Selling price
 Cost to complete
 Cost to sell

Rs 100
Rs 90
Rs 5
10% of SP
Measure the stock as per LKAS 2
COST OF INVENTORIES

The cost of inventories comprises all
1. Costs of purchase
 2. Costs of conversion
 3. Other cost incurred in bringing the inventories to
their present location and condition

Costs of Purchase
The costs of purchase constitute all
 The purchase price
 Import duties
 Transportation costs
 Handling costs directly pertaining to the acquisition of
the goods

Trade discounts and rebates are deducted when arriving at the cost of purchase of inventory
Costs of Conversion of Inventory
•
Direct labor, indirect variable and fixed production
overhead costs
•
Variable production overhead: allocate to inventory
based on actual usage
•
Fixed production overhead: allocate to production based
on normal operating capacity (except when abnormally
high production)
Other Costs in Valuing Inventories
Other Costs in Valuing Inventories
Other costs in valuing inventories include those costs that
are incurred in bringing the inventories to their present
location and condition

i.e costs of designing products for specific customer
needs.

Excluded Costs from Inventory Valuation
Certain costs are not included in valuing inventory. They are
recognized as expenses during the period they are incurred.
Examples of such costs are
1. Abnormal amounts of wasted materials, labor, or other
production costs
2. Storage costs unless they are essential to the production
process
3. Administrative overheads that do not contribute to bringing
inventories to their present location and condition
4. Selling costs

Ex: Following information extracted from Nice Furniture Company which
imports & trading furniture in Srilanka
Cost of Purchases
20 Mn
 PAL & NBT
5 Mn
 VAT
2.4Mn
 Freight and insurance on purchases
5 Mn
 Other handling costs relating to imports
2 Mn
 Salaries of stores department
1 Mn
 Brokerage commission payable to indenting agents for arranging imports 3Mn
 Sales commission payable to sales agents
1.5Mn
 After-sales warranty costs
2.4Mn

TECHNIQUES FOR MEASUREMENT OF COSTS
COST FORMULAS
- Assign recent costs to ending inventory
- Correspond closely with the actual physical flow of the
goods and services
- Three permitted:
Specific identification
First-in, first-out (FIFO)
and weighted average

Specific identification:
 For inventory items that are not ordinarily interchangeable
 For goods and services produced and segregated for specific
projects
FIFO and weighted average:
 FIFO – The FIFO method assumes that the inventories that are
purchased first are sold first, with the ending or remaining items
in the inventory being valued based on prices of most recent
purchases.

Weighted average – weighted average cost of all goods available
for sale ends up in both ending inventory and cost of goods sold

The information about the inventory balance at the beginning and purchases made during
the year 2013 are given below:
Jan 1
Beginning balance:
400 units @ 18 per unit
7,200
April 12
Purchases:
600 units @ 20 per unit
12,000
Oct. 17
Purchases:
800 units @ 22 per unit
17600
Dec. 15
Purchases:
200 units @ 24 per unit
4,800
Available during the year 2013
————
———-
2,000 units
41,600
————
———-
On 31st December 2013, 600 units are on hand according to physical count.
Required: Compute the following using first-in, first-out (FIFO) method:
1.Cost of ending inventory at 31 December 2013.
2.Cost of goods sold during the year 2013.

Ex 2
The following are the purchases and sales made by Global trading Ltd(as a
newly set up company, has no beginning inventory):

Purchases

◦ Jan
100 @ Rs.200
◦ April
200 @ Rs. 150
◦ September 100 @ Rs. 175

Sales
◦ Feb
150
◦ December 200
◦ Determine the value of the Inventory as at 31st December under the weighted-average
cost method
RECOGNITION OF EXPENSE

When inventory is sold, the carrying amount of
inventory should be recognized as an expense when the
related revenue is recognized. Moreover, the amount of
any inventory written down to net realizable value is
recognized as an expense.
DISCLOSURE








Accounting policies adopted for measuring inventories and the cost flow
assumption (i.e., cost formula) used
Total carrying amount as well as amounts classified as appropriate to the
entity
Carrying amount of any inventories carried at fair value less costs to sell
Amount of inventory recognized as expense during the period
Amount of any write-down of inventories recognized as an expense in
the period
Amount of any reversal of a write-down to net realizable value and the
circumstances that led to such reversal
Circumstances requiring a reversal of the write-down
Carrying amount of inventories pledged as security for liabilities