Financial Accounting & Reporting 2. Topic: Inventory

2
FINANCIAL ACCOUNTING
& REPORTING 2
TOPIC: INVENTORY
Learning Outcomes
1. Define inventories as per MFRS102—Inventories.
2. Identify and explain the classification of inventories.
3. Discuss the recognition and measurement of inventories.
4. Identify the types of costs that should be included in the valuation of

inventories.
5. Apply the cost formulas for measuring inventories under the specific
identification; first-in, first-out (FIFO);and weighted average cost methods
6. Describe the key disclosure of inventories.
FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2016 2– 2
Introduction
 Inventory, or previously known as ‘stock commonly, relates to the

finished products sold by a retailer.
 The term inventory is broad and not only covers finished
products, it covers raw materials, work-in-progress and finished
products.
 Due to overwhelming and huge size of inventory, the proper
accounting system to determine the cost of inventory incurred
and how much profits are derived is needed.

Types of Inventory
Type of Term Clarification Example

Business
The cost of goods purchased
Retailer Merchandise inventory for resale and still on hand at Groceries in hypermarket
the reporting date
Source products that are

Rolls of silk in a cloth
Raw material inventory required when manufacturing
manufacturer factory
the products for sale
Trousers with no pocket or

back pocket
Inventory that is partly
Manufacturer Work-in-progress inventory complete and held within the
factory
Shirt with no neck button and
complete collar
Completed trousers and shirts

Finished product inventory Inventory that is ready for sale ready for distribution to
retailers

Definition
 Inventories are assets:

– held for sale in the ordinary course of business;
– in the process of production for such sale; or
– in the form of materials or supplies to be consumed in the

production process or in the rendering of services.

Measurement
 Inventories shall be measured at the lower of cost and nett

realizable value (NRV).
 Cost of inventories consists of costs of purchase, costs of

conversion and other costs which are included in the cost of
inventories only to the extent that they are incurred in bringing
the inventories to their present location and condition.

Measurement (cont.)
 Other costs that cannot be included in the cost of inventories are:

– abnormal amounts of wasted materials
– labour or other production costs
– storage costs unless those costs are necessary in the

production process before a further production stage
– administrative overheads that do not contribute to bringing
inventories to their present location and condition

Measurement (cont.)
 Other costs that cannot be included in the cost of inventories

are:
– selling and marketing costs
– agents’ commissions
– tax cost (other than non-refundable tax), settlement

discounts, and rebates
– E.g. 2.2 p.70

Cost Formulas
 Three cost formulas allow for the measuring of the cost of

inventory: specific identification; first-in, first-out (FIFO); or
weighted average cost.
• Specific identification applies where each item of the inventory

can be identified separately and individually, provided the cost of
inventories are not ordinarily interchangeable and goods or
services are produced and segregated for specific projects.

Cost Formulas (cont.)
 First-in, first-out (FIFO)—The cost of inventory is calculated on the

assumption that the inventory on hand at the beginning of the period will be
sold first, and the latest inventory received will be the inventory on hand at
the end of the period. E.g. 2.4 p.73
 Weighted average cost—The cost of all inventories available for sale is
divided by the number of units of all inventories available for sale for the
period. E.g. 2.5 p.75
 Example in-class: Q1 & Q2 p. 89
 In class exercise: Q4 p.91

Nett Realizable Value
 Inventories shall be measured at the lower of cost and nett

realizable value.
 The practice of writing inventories down below cost to nett

realizable value is consistent with the view that assets should
not be carried in excess of amounts expected to be realized
from their sale or use. E.g. 2.6, p.77

Nett Realizable Value (cont.)
 Inventories are usually written down to nett realizable value

item by item. It is still appropriate to group similar or related
items. E.g. 2.8 p.78
 Estimates of nett realizable value are based on the most

reliable evidence available at the time the estimates are
made

Disclosure Requirement
In the Statement of Comprehensive Income, the disclosure

requirement of inventory will include:
expenses (cost of sales) that are not carried forward as inventories at
the reporting date.
cost of sales comprises cost of goods sold for the year, cost of
inventory that was lost or damaged during the year, the cost of writing
inventory down to nett realizable value, unallocated overheads and
excessive wastage, or any other manufacturing costs that cannot be
included in the cost of inventory.

Disclosure Requirement (cont.)
On the face of the Statement of Financial Position, the disclosure

requirement is:
the accounting policy selected to treat the inventories should
be disclosed, including the method to determine the inventory
cost and the total carrying amount of inventories.


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2

1. Define inventories as per MFRS102—Inventories.

2. Identify and explain the classification of inventories.

3. Discuss the recognition and measurement of inventories.

4. Identify the types of costs that should be included in the valuation of

6. Describe the key disclosure of inventories.

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 Inventory, or previously known as ‘stock commonly, relates to the

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

Type of Term Clarification Example

Source products that are

Trousers with no pocket or

Completed trousers and shirts

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 Inventories are assets:

– in the process of production for such sale; or

– in the form of materials or supplies to be consumed in the

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 Inventories shall be measured at the lower of cost and nett

 Cost of inventories consists of costs of purchase, costs of

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 Other costs that cannot be included in the cost of inventories are:

– labour or other production costs

– storage costs unless those costs are necessary in the

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 Other costs that cannot be included in the cost of inventories

– tax cost (other than non-refundable tax), settlement

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 Three cost formulas allow for the measuring of the cost of

• Specific identification applies where each item of the inventory

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 First-in, first-out (FIFO)—The cost of inventory is calculated on the

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 Inventories shall be measured at the lower of cost and nett

 The practice of writing inventories down below cost to nett

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 Inventories are usually written down to nett realizable value

 Estimates of nett realizable value are based on the most

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

In the Statement of Comprehensive Income, the disclosure

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

On the face of the Statement of Financial Position, the disclosure

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

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