PAS 2

INVENTORIES
I. PAS 2 Inventories
A. Prescribes the accounting treatment for inventories

B. Recognizes that a primary issue in the accounting for inventories is the determination
of cost to be recognized as asset and carried forward until it is expensed.

C. Provides guidance in the determination of cost of inventories, including the use of cost
formulas, and their subsequent measurement and recognition as expense.

D. PAS 2 applies to all inventories except for the following:

1. Assets accounted for under other standards
a. Financial instruments (PAS 32 and PFRS 9); and
b. Biological assets and agricultural produce at the point of harvest (PAS
41)
2. Assets not measured under the lower of cost or net realizable value (NRV)
under PAS 2
a. Inventories of producers of agricultural, forest, and mineral products
measured at net realizable value in accordance with well-established
practices in those industries.
b. Inventories of commodity broker-traders measured at fair value less
costs to sell.
II. Inventories
A. Definition - Inventories are assets:
1. Held for sale in the ordinary course of business (finished goods)
2. In the process of production for such sale (work in process)
3. In the form of materials or supplies to be consumed in production process or in
the rendering of services (raw materials and manufacturing supplies)

B. Measurement
1. Inventories are measured at the lower of cost and net realizable value.
2. Net realizable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.
3. Write down of Inventory
a. The cost of the inventory is written-down to NRV should the cost
exceeds its recoverable amount due to the following:
i. damaged inventory
ii. inventory has become obsolete
iii. selling prices have declined
iv. estimated costs to complete or sell inventory have increased
b. Entry of write-down
Loss on inventory xx
Allowance for inventory write-down xx
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INVENTORIES
c. Entry for reversal
Allowance for inventory write-down xx
Gain from reversal of inventory write-down xx
d. Reversals shall not exceed the original write-down.
e. Write-downs of inventories are usually carried out on an item-by-item
basis.
f. Raw materials inventory is not written down below cost if the finished
goods in which they will be incorporated are expected to be sold at or
above cost.

C. Cost of Inventory
1. Purchase cost - this includes the purchase price (net of trade discounts and
other rebates), import duties, non-refundable or non-recoverable purchase
taxes, and transport, handling and other costs directly attributable to the
acquisition of the inventory.
2. Conversion costs - these refer to the costs necessary converting raw materials
into finished goods. Conversion in costs include the costs of direct labor and
production overhead.
3. Other costs necessary in bringing the inventories to their present location and
condition.

D. Exclusion from cost

1. Abnormal costs
2. Storage costs (unless necessary)
3. Administrative costs
4. Selling costs

E. Cost Formulas
1. Definition
a. deal with the computation of cost of inventories that are charged as
expense, as well as cost of unsold inventories at the end of the period
that a recognized as asset
b. pertains to the flow of costs (cost flow assumption), not the physical
flow of inventories
2. Formulas
a. Specific identification - this shall be used for inventories that are not
ordinarily interchangeable and those that are segregated for specific
projects.
b. First-In First-Out (FIFO) - it is assumed that inventories that were
purchased or produced first are sold first and therefore unsold
inventories at the end of the period are those most recently purchased
or produced
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INVENTORIES
c. Weighted Average - cost of sales and ending inventory are determined
based on the weighted average cost of beginning inventory and all
inventories purchased or produced during the period; calculated using
periodic or moving average.
3. PAS 2 does not permit the use of a last-in, first out (LIFO) cost formula.

F. Recognition as an Expense
1. The carrying amount of an inventory that is sold is charged as expense (ie, cost
of sales)
2. The write-down of inventories to NRV and all losses of inventories are
recognized as expense.
3. The amount of any reversal of any write-down of inventories, arising from an
increase in net realizable value, shall be recognized as a reduction in the
amount of inventories recognized as an expense in the period in which the
reversal occurs.

III. Disclosures
A. Accounting policies adopted in measuring inventories, including the cost formula used
B. Total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity
C. Carrying amount of inventories carried at fair value less costs to sell
D. Amount of inventories recognized as an expense during the period
E. Amount of any write-down of inventories recognized as an expense in the period;
F. Amount of any reversal of write-down that is recognized as a reduction in the amount
of inventories recognized as expense in the period
G. Circumstances or events that led to the reversal of a write-down of inventories
H. Carrying amount of inventories pledged as security for liabilities
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INVENTORIES

OPPUS, CRISTINE JANE, G.