M2: Assets (IAS 2 Inventories) Flashcards
(13 cards)
What is inventory and why do companies hold inventory?
Inventories are goods (either purchased or manufactured) that are held by an entity with a view to being sold to customers in the ordinary course of business or consumed by the business during the
production process or in the rendering of services.
Where does inventory appear in the financial statements?
Inventories are recognised in both the statement of profit or loss and the statement of financial
position.
What is the formula to know inventory valuation?
Lower of Cost and Net Realisable Value (NRV).
If NRV is below cost where do we post this?
We put this through cost of sales and have to write it off.
How do you calculate net realisable value?
NRV = Actual/estimated selling price – costs to complete – selling costs
Why might there be write-downs in inventory?
A fall in selling price due to market conditions
Physical deterioration of inventories
Product obsolescence (sometimes this can be driven by sustainability awareness)
A marketing strategy decision to sell some products at a loss
Errors in production or purchasing
What is the journal for reducing inventory amount on the SOFP after a write-down?
DR SPL - COS
CR Inventory
How is inventory presented in a set of financial statements?
SOFP: Current asset for inventories at their lower of cost or NRV amount total
SPLOCI: Inventory balances at start of year affecting COS. Inventory write downs and any other
inventory related expenditure
SOCF: Movement in the inventory balances are included in reconciliation of profit to cash in operating
activities section
Notes: Accounting policies, Carrying amount of inventories at NRV, amount of inventories recognised
as expense in current year, write downs and reversals of write downs, carrying amount of inventories
pledged as security against liabilities.
How do you think you can determine the cost of an item of inventory
PURCHASE COSTS - Purchase price, Irrecoverable import duties and other taxes, Transport costs to the current location, Handling costs, Other directly attributable, costs. REMOVE: Trade discounts & rebates subsidies
OTHER COSTS - Only included if they are necessarily incurred In bringing inventories to current location & condition, Interest on borrowing costs on a qualifying asset. DO NOT INCLUDE: Abnormal amounts or wastage, Administration overheads, Storage costs (unless necessary part of production) Selling costs
CONVERSION COSTS - Added to purchase and other
costs for WIP & Finished Goods. DIRECT: Variable, directly related to production. INDIRECT: Systematic allocation of indirect fixed and variable overheads incurred to convert materials from raw materials to
finished goods.
Variable and Fixed production overheads
What do we need to consider when allocating fixed production overheads onto products?
& what’s the risk?
We must consider if actual production is lower than normal capacity, and if so restrict the fixed overheads.
The risk: Overstating inventory using this method.
What do we do in terms of allocating costs to inventory if Actual production is < Normal capacity, Actual production > Normal capacity?
Actual < Normal = We use normal capacity to allocate overhead per unit and we capitalise less costs than normal to the inventory figure on the SoFP.
Actual > Normal = We use actual cost of overheads per unit so we don’t exceed the actual and thus overstate the inventory on the SoFP.
What estimation methods can you use when you don’t have all the exact information for Inventory?
Standard costing
Retail method
FIFO
Weighted average
When a question asks us to provide the fixed production overheads as at the YE date (what does this indicate & what’s the formula for this?
Indicates we have been inefficient during the year and we need to put our unabsorbed cost into the P&L as an expense.
We see how much we should have produced vs actual = Difference in units x Fixed production overhead
e.g. 10,000 units Normally. Actual = 8,000 units. Difference = 2000 units x Fixed production overhead is what is our excess/underabsorped amount to post in the SPL.
