PAS 2 - Inventories

Question 1

Scope

What are included in inventory?

Answer 1

• Raw materials (materials and supplies that are consumed in production)
• Work in process (assets in the production process for sale in the ordinary course of business)
• Finished goods (goods for sale in the ordinary course of business)

Question 2

Scope

What are not included in the scope of PAS 2?

Answer 2

• financial instruments ( IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments)
• biological assets related to agricultural activity and agricultural produce at the point of harvest (IAS 41 Agriculture).

Question 3

Recognition Principle

When to recognize inventory?

Answer 3

If recognition provides users of FS with information that is useful ( 2018 Conceptual Framework)

Question 4

Initial Measurement

Inventories are initially measured at ___________.

Answer 4

COST

Question 5

Initial Measurement

What are included in cost of inventory?

Answer 5

• Cost of purchase
• Cost conversion (for manufacturing entities)
• Other costs incurred in bringing the asset to its present location and condition

Conversion cost = direct labor + manufacturing overhead

Question 6

What are the expenditures that are generally recognized as expenses but may be included as cost of inventory?

Answer 6

• administrative overhead

Provided that such expenditure is related to production

Note: Selling expenses are always recognized as expense.

Question 7

Inventory cost should not include ___________.

Answer 7

• abnormal waste
• storage cost of finished goods
• administrative overheads unrelated to production
• selling costs
• 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

Question 8

Cost formula

TRUE or FALSE

For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory (i.e. specific identification).

Answer 8

TRUE

Question 9

Cost Formula

For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas.

Answer 9

TRUE

Question 10

Cost Formula

The LIFO formula is no longer allowed.

Answer 10

TRUE

Question 11

Cost Formula

Under FIFO, the cost of goods sold is based on the current cost while the cost of ending inventory is based on old cost.

Answer 11

FALSE

FIFO
COGS - old cost ; Ending inventory - current cost

LIFO
COGS - current cost; Ending inventory - old cost

Question 12

Cost Formula

Under FIFO, if there are sales return, the cost of sales return should be based on the recent purchase where the cost of the related sale is based.

Answer 12

TRUE

Question 13

Subsequent Measurement

Inventories are subsequently measured at __________________.

Answer 13

Lower of Cost and Net Realizable Value (LCNRV)

Question 14

NRV is computed as ____.

Answer 14

• Finished goods - Estimated selling price less estimated cost to sell
• Work in process - Estimated selling price less estimated cost to complete and estimated cost to sell
• Raw materials - Replacement cost

Question 15

If NRV is less than cost, ____ should be recognized in income statement.

Answer 15

loss on inventory writedown

recognized as expense in the period in which the writedown occurs

Question 16

When to recognize loss on writedown of raw materials?

Answer 16

If the cost of the finished goods in which they will be incorporated exceeds the net realizable value

In such circumstances, the best available measure of the net realizable value of materials is the replacement cost.