Question

Question 2   

Inventories are a key asset in most merchandising retail businesses. However, accounting for and valuing inventory is sometimes challenging for these businesses. The questions that follow relate to the accounting standard as per IFRS that governs accounting for inventories. In quoting from the summary standard, you are required to research, appropriate paragraph referencing is required where necessary.

a) What standard govern the accounting for inventory? When was this standard issued? When did this standard become effective?    

b) What is the fundamental principle of this standard?     (1.5 marks)

c) What is the IFRS definition of Inventories?      (2marks)

d) It is sometimes difficult for a business to determine what costs should be included in the cost of inventory. Outline the costs that are to be included in the cost of inventory as prescribed by IFRS.       

e) List three costs that should be excluded from the cost of inventory and should ALWAYS be expensed.        (2.5 marks)

f) Which inventory valuation method is no longer accepted by IFRS?   (1 mark)

g) What inventory valuation method is prescribed for non-interchangeable items?                 (1 mark)

h) Inventories are required to be disclosed as a separate item on the company’s balance sheet, identify three items relating to inventories that Must be disclosed.             

Answer 1

a) IAS-2 governs the accounting for inventory. The revised IAS 2 inventories or International Accounting Standard 2 Inventories has replaced IAS 2 inventories in 1993. These standards were applied annually from January 1, 2005

b) The fundamental principle of AS 2 states that inventory must be valued at its cost or its net realizable value, whichever is lower.

c) It defines inventories as assets which are:

i) Held for sale in the ordinary course of business.

ii) in the process of production for such sale.

iii) in the form of materials r supplies to be consumed in the production process or rendering of services.

d) The costs that are to be included in the cost of inventory as prescribed by IFRS:

i) cost of purchase (including taxes, transport, and handling) net of trade discounts received

ii) costs of conversion (including fixed and variable manufacturing overheads) and

iii) other costs incurred in bringing the inventories to their present location and condition.

e) Three costs that should be excluded from the cost of inventory and should ALWAYS be expensed are:

i) administrative overheads unrelated to production

ii) selling costs

iii) interest cost when inventories are purchased with deferred settlement terms.

f) The Last-In-First-Out (LIFO) method of inventory valuation is prohibited under the International Financial Reporting Standards (IFRS).

g) The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs.

h) Three items related to inventory that must be disclosed are:

i) Raw Materials

ii) Work in Progress

iii) Finished goods