Question

1. There are different basis approaches to valuing inventory that are allowed by GAAP, explain the principal’s methods of valuation required by IAS2 inventories, provide some evidence which could be applied in annual reports

Answer 1

As per ias 2 inventory is to be measured at the lower of cost and net realisable value and outline acceptable method of determining cost including first in first out and weighted average cost

It is applicable to all inventories except construction contract including work in progress , directly related to the service contract and financial instruments

As per ias 2 inventory as the assets

1 Held for sale in the ordinary course of business

2 In the process of production for such sale

3 In the form of materials and supplies to b e consumed in the production process or in the rendering services

Inventories are measured lower of cost or net realisable value.

Cost includes the purchase cost , conversion cost and other cost incurred to bring the inventories to their present condition and location

Net realisable value is estimated selling price during normal course of business less estimated cost to make a sale.

Some cost are not included in the inventory. Such as

Abnormal wastage of material or labour cost

Storage cost if it is not necessary

Administrative cost if it is not necessary to bring the inventory to the current location.

Selling and distribution cost

Purchase cost include invoice price ,trade discount , handling charges, import duty if any etc