Question

A) International Accounting Standard 2 aims at addressing different aspects related to inventories maintained by any business. It requires inventories to be stated in the financial accounts at lower of cost or net realizable value. The standard even suggests the methods for valuation of inventory.

Required:   

Explain the objective of IAS 2. The standard also suggests the use of an inventory valuation method “Specific Identification Method in certain cases. Discuss this method in detail with the help of relevant examples.

Answer 1

Ans :

Objective of IAS 2

The main objective of the standard is to provide the method of accounting for inventories.This standard prescribe the accounting treatment for inventories and set the guidelines to determine the value at which the inventories are carried in financial statements.It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories

Inventory Valuation Method 'Specific Identification Method'

Specific identification is a method of finding out ending inventory cost. It requires a detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year end inventory.

This method is the best method, since it relates the ending inventory goods directly to the specific price they were bought for. However, management can easily manipulate ending inventory cost, since they can choose to report that cheaper goods were sold first, ultimately raising income.

Alternatively, management can choose to report lower income, to reduce the taxes they needed to pay.