Question

(a) The 2018 New Zealand Conceptual Framework states that “an asset is a present economic resource controlled by the entity as a result of past events.” Discuss this statement in relation to inventory items that are in transit between the buyer and seller.

(b) NZ IAS 2, paragraph 36 requires companies to make disclosures to present inventory fairly in their financial statements. List six disclosures that companies must include in the financial statements as additional disclosures.

Answer 1

A ) STATEMENT IN RELATION TO INVENTORY ITEMS THAT ARE IN TRANSIT BETWEEN BUYER AND SELLER :

What is An Inventory ?

Inventory Includes goods that are ready for sale as well as any physical resources used in the production of the finished products. Inventory should be reported as a short-term or current asset as it is usually liquidated (turned into cash) within a year.

INVENTORY IN TRANSIT :

Inventory in transit refers to inventory items and other products that have been shipped by a seller, but have not yet reached the purchaser.

If the terms are FOB shipping point, the goods in transit are the property of the buyer.

If the terms are FOB destination, the goods in transit are the property of the seller.

FORMULAE OF TRANSIT OF GOODS :

In-transit quantity = the total sum of goods shipments and inventory consumption,

if Logistics Service Providers (LSP) are involved from the determined last received shipment until today.

TRANSIT INVENTORY IN ASSETS :

GIT is booked in books of accounts on quarterly basis to ascertain true & fair view of financial statements.

Goods in transit is presented under CURRENT ASSETS under sub heading INVENTORY in statement of accounts.

In other words ,

In transit of Inventory to merchandise and other types of inventory that have left the shipping dock of the seller, but not yet reached the receiving dock of the buyer. The concept is used to indicate whether the buyer or seller of goods has taken possession, and who is paying for transport. Ideally, either the seller or the buyer should record goods in transit in its accounting records. The rule for doing so is based on the shipping terms associated with the goods, which are:

FOB shipping point : If the shipment is designated as freight on board (FOB) shipping point, ownership transfers to the buyer as soon as the shipment departs the seller.

FOB destination : If the shipment is designated as freight on board (FOB) destination, ownership transfers to the buyer as soon as the shipment arrives at the buyer..

The delay in recording the receipt of goods by the buyer is not really a problem, as long as the business refrains from also recording the related account payable until such time as it records the related inventory. Otherwise, there will be a mismatch between the asset and related liability.

B ) DISCLOSURE OF INVENTORY IN FINANCIAL STATEMENTS :

NZ - IAS 2

It Gives us Clear Knowledge of the Board announced that, as part of its initial agenda of technical projects, it would undertake a project to improve a number of Standards, including IAS 2. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the Improvements project were to reduce or eliminate alternatives, Redundancies and conflicts within Standards, to deal with some convergence issues and to make other
improvements.

DISCLOSURES :

( 1 ) the accounting policies adopted in measuring inventories, including the cost formula used;

( 2 ) the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity;

( 3 ) the carrying amount of inventories carried at fair value less costs to sell;

( 4 ) the amount of inventories recognised as an expense during the period;

( 5 ) the amount of any write-down of inventories recognised as an expense in the period in
accordance with para 34 ;

( 6 ) the amount of any reversal of any write-down that is recognised as a reduction in the amount of

inventories recognised as expense in the period in accordance with paragraph 34 ,

( 7 ) the circumstances or events that led to the reversal of a write-down of inventories in accordance with paragraph 34 ;

( 8 ) the carrying amount of inventories pledged as security for liabilities.