INTERNATIONAL FINANCIAL

REPORTING STANDARD

IAS2- INVENTORY
DEFINITIONS OF TERMS
Cost
Finished goods.
Goods in transit.
Joint products.
By-products.
First-in, first-out (FIFO).
Last-in, first-out (LIFO).

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DEFINITIONS OF TERMS
Weighted-average.
Specific identification.
Net realizable value.
Periodic inventory system.
Perpetual inventory system.
Raw materials.
Work in process.

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RECOGNITION AND
MEASUREMENT
IAS 2 - Objective and Scope
•Standards for what costs are recognized as
inventory costs and when these costs are
transferred to the income statement as expense
•IAS 2 excludes construction work-in-progress,
inventories of financial instruments, and
biological inventory assets related to
agricultural activity and agricultural products at
the point of harvest

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INVENTORIES: WHAT
ARE THESE?
RAW
MATERIALS
Short-term asset
that business is
WORK IN
selling or will selling
PROGRESS

FINISH
GOODS
HONDA VIETNAM
Two types of systems for maintaining inventory
records — perpetual system or periodic
system.
•Periodic inventory system, the inventory
quantity is determined periodically by a
physical count.
•Perpetual inventory system keeps a running
total of the quantity (and possibly the cost) of
inventory on hand by recording all sales and
purchases as they occur.
INVENTORIES: HOW TO MEASURE?
Each item of inventory is value at the lower of:
NET What we expect to gain from the
REALISABLE sales of inventory:
VALUE = Expected selling price – Cost
(NRV) to complete the item for sales
– Cost to sell (ex: delivery
cost, commission cost)
IAS2: Purchase cost, Conversion
cost, Other cost
Direct labour
Purchase price
COST Direct expense
Delivery cost
Import duties Share of production
overhead
COSTS ITEMS EXCLUDED FROM COST OF INVENTORIES

a) Abnormal amounts of wasted materials,

labor or other production costs

b) Storage costs, unless those costs are

necessary in the production process before a
further production stage

c) Administrative overheads

d) Selling costs
 EXAMPLE
By the end of the year entity had 100 units in
warehouse of X-Pro. Units are so far reported at
total cost of 10,000.
Recently fire broke out and damaged the outer
casing of units. Engineers have confirmed that
product can still fetch full selling price if outer
cover is replaced. Currently X-Pro is selling for
$110 per unit and cost of repair is estimated to be
$5 per unit. Additionally entity will have to pay
$2,000 in total towards the carriage cost to move
repaired goods from workshop to warehouse.
SOLUTION
Selling price : 110*100= $11,000
Cost of repair : 5*100= $500
Carriage cost: $2000
Total NRV : $8,500
Total Cost: $10,000
NRV (8,500) < Cost (10,000)
Therefore, inventory will be valued at 8,500.
METHODS OF INVENTORY COSTING
A company buys 1000 chocolate bars for 30 VND.
The amount is as follows:
Inventory: 30 000 (1 000 * 30)
Accounts payable : 30 000
The company sells 200 bars of 40 VND / bar. The amount
is as follows:
Accounts receivable : 8 000 (200 * 40)
Sales revenue : 8 000
The company recorded the number of chocolate
exported as follows:
Cost of goods sold: 6 000 (200 * 30)
Inventory: 6 000
The following transactions took place during
the year:
(a) Purchased 354 settings (FOB shipping) at
$670 each on credit terms of 2/10, n/30 from
Grimstad Pty Ltd.
(b) Sold, on credit, 350 settings for $975 each.
(c) Returned 4 settings to the supplier.
(d) 7 settings were returned by customers.
The journal entries necessary to record these
transactions under both inventory accounting
methods are shown below.

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In the above example, the company clearly
identifies the cost of goods sold due to the
selling price of 30 VND / bar.
But what happens if the company buys batch
chocolate at different prices?
For example, suppose the company buys 100
chocolate bars at 31 VND / bar, 150 bars at
32.50 VND / bar, 200 bars at 29 VND / bar ...
In this case, what is the cost of goods sold?
Cost of goods sold will depend on the method
of calculating the value of inventory used by
the company.
 METHODS OF
INVENTORY COSTING
Goods or services produced and segregated for
specific projects shall be assigned by using
Specific identification of their individual costs
First-in, First out (FIFO)
Weighted-average
 FIFO Weighted- LIFO
average

IAS 2 accepted IAS 2 accepted IAS DO NOT

accepted
The first goods The cost of The last goods
purchased will goods available purchased will
be the first for sale is be the first
goods to be divided by the goods to be
used or sold unit available to used or sold
sale
In the year 20X1, Yummie - a confectionery and chocolate
distribution company - made the following purchase of
"Excellent Chocolate" as follows:
Date Unit Unit price
10/1 / 20X1 1,000 $ 28
14/2 / 20X1 1,000 $ 28.2
17/3 / 20X1 3,000 $ 28.4
18/6 / 20X1 2,500 $ 28.55$

Since "Excellent Chocolate" is still a new product, the

extensive product campaign is expected to take place
after 1/7 / 20X1, Yummie only sells 4,200 "Excellent
Chocolate" on 2/5 / 20X1.
Requirements: Determine the value of "excellent
chocolate" in Yummie's warehouse at the time of 30/6 /
20X1? (FIFO, Weighted average cost)
Date Description Quantity Price/unit
Jan 1 Beginning 500 $5
inventory
Jan 7 Purchase 750 $7
Jan 13 Sale 650
Jan 20 Purchase 400 $4
Jan 27 Purchase 300 $6
Jan 30 Sale 700

Requirements: Determine the value at the time

of Jan 30 by 2 different methods FIFO, Weighted
average cost
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