Lecture 4: Accounting for inventory and tangible non-current assets.

Question 1

Inventory Overview:

Answer 1

Inventory is:
- Raw materials
- Work in progress
- Finished goods

IAS 2 inventories is the IFRS standard which covers inventory.

Question 2

Accounting for inventory - Valuation.

Answer 2

Inventory should be valued in the financial statements at the lower of cost (a) and net realisable value (b).

Question 3

Accounting for inventory - Costs

Answer 3

Costs include:
- Purchase price
- Delivery costs
- Import taxes
- Duties

• Conversion costs (any costs involved in converting the raw materials into the final product, e.g. labour, appropriate share of production overheads and expenses directly related to the product).

i.e costs incurred to bring the item to its location and current condition.

Question 4

Net realisable value represents …

Answer 4

The expected selling price - any costs to be incurred to make that sale.

Question 5

Which IFRS standard covers tangible non-current assets:

Answer 5

IAS 16 Property, Plant and Equipment.

Question 6

Tangible Non-Current Assets (Overview):

Answer 6

Key phases of accounting:

Purchasing the asset (cost)

Using the asset within the business:
- Depreciation
- Accumulated depreciation
- Carrying amount (Netbook Value)

Question 7

Tangible Non-Current Assets costs:

Answer 7

How do we measure cost:
- Amounts incurred to acquire the asset.
- Any amounts in bring product to location and current form.

Directly attributable costs include:
- Purchase Price
- Delivery costs
- Stamp duty and import duties
- Professional fees, such as legal and architects fees.
- Costs of testing whether the asset is functioning
- Costs of preparing the site for installation and assembly for the asset.

Question 8

Items which cannot be included in the cost of property, plant and equipment include:

Answer 8

• Repairs
• Renewals
• Repainting
• Administration
• General overheads
• Training costs
• Wastage.

Question 9

Tangible Non-current assets:

How do we account for the asset’s costs:

Answer 9

If the asset was purchased with cash:

a) Increase non-current assets (property, plant and equipment) - statement of financial position

b) Decrease current assets (cash and cash equivalents) - statement of financial position

If the asset was purchased on credit:

a) Increase in non-current assets (property, plant, equipment) - statement of financial position

b) Increases current liabilities (trade and other payables) - statement of financial position.

Question 10

Depreciation is …

Answer 10

The systematic allocation of the cost of an asset - its residual value / useful life.

Posted to the statement of profit or loss as an expense.

Question 11

Why depreciate non-current assets?

Answer 11

Asset contributes to generating income over several periods, so wouldn’t be appropriate to charge the full expense within a single period.

• This is an application of the accruals concept.

Question 12

Tangible Non-current assets - Depreciation.

How do we account for this:

Answer 12

Every period, to reflect the depreciation charge:
a) Decrease non-current assets (Property, Plant and Equipment) - statement of financial position.
b) Increase expenses - statement of profit or loss.

This entry in the financial statements has the following effects:
- Decreases the carrying amount (Net book value) of the asset.
- Decreases profit because of an increase in expenses.

Question 13

Tangible Non-Current assets - 2 different depreciation methods.

Answer 13

1) Straight line method: This method results in the same depreciation charge each period. And it is used wherever the pattern of use of an asset is consistent throughout its life e.g. buildings.

2) Reducing Balance Method: This method results in constantly reducing depreciation charge throughout the life of the asset.
- Done to reflect the expectation that the asset will be used less and less as it ages e.g. vehicles.