Download 3-Accounting of Inventories

Ias 2 Inventories
1-Scope
This Standard applies to all inventories
other than
• Work in progress under construction
contracts and directly related service
contracts
• Financial instruments
• Biological assets related to agricultural
activity and agricultural produce at
the point of harvest
The main issue with respect to
accounting for inventory is the
amount of cost to be recognized as
an asset.
2-Key Terms
Inventory. An asset
(a) Held for sale in the normal course of business;
(b) In the process of production for such sale; or
(c) In the form of materials or supplies to be used in
the production process or in rendering of
services.
Net realizable value. The estimated selling price in
the normal course of business less estimated
cost to complete and estimated cost to make a
sale.
Fair value. The amount at which an asset could be
exchanged, or a liability settled, between
knowledgeable, willing parties.
Ias 2 Inventories
3-Accounting of Inventories
inventories are valued at the
“lower of cost and net realizable
value.
4- COST OF INVENTORIES
1-The cost of inventories comprises all

(a) Costs of purchase

(b) Costs of conversion

(c) “Other costs” incurred in bringing the
inventories to their present location
2- The costs of purchase constitute all of
• The purchase price
• Import duties
• Transportation costs
• Handling costs directly pertaining to the
acquisition of the goods
Trade discounts and rebates are deducted
when arriving at the cost of purchase of
inventory.
Ias 2 Inventories
3- Costs of Conversion of Inventory ,
include variable and fixed manufacturing
overhead incurred in converting raw
material into finished goods. The allocation
of overhead to the cost of conversion is
based on the “normal capacity” of the
facility. Normal capacity is the production
that is normally achieved on average over
a number of periods, taking into account
the loss of capacity that may result.
Other costs in valuing inventories include
those costs that are incurred in bringing
the inventories to their present location
and condition. An example of such “other
costs” is costs of designing products for
specific customer needs.
4- Costs that are Excluded from
Inventory Valuation
(a) Abnormal amounts of wasted materials,
labor, or other production costs
(b) Storage costs unless they are essential to
the production process
(c) Administrative overheads that do not
contribute to bringing inventories to their
present location and condition
(d) Selling costs
Ias 2 Inventories
5-Critical Note : Inventory
Purchased on Deferred
Settlement Terms
When inventories are purchased on
deferred settlement terms, such
arrangements contain a financing
element. The difference between the
purchase price for normal credit terms
and the amount paid, is recognized
as interest expense over the period of
the financing arrangement.
Ias 2 Inventories
Example of a consignment arrangement
X Company ships a consignment of usb drivers to a
retail outlet of the Carty Inc . X Company’s cost of the consigned
goods is 2000 TL
DR
CR
152 Inventories
2.000
02 Consignment out inventory 2.000
152 Inventories
2.000
01 Finished goods inventory 2,000
The sailers company ships the USB drivers inventory from X Company to
Carty Inc. Upon receipt of an invoice for this 250 + VAT (18%) shipping expense, X Company records the following entry:
DR
152 Inventories
250
02 Consignment out inventory 250
191 Deductable V.A.T
45
320 Accounts payable
CR
295
Carty Inc. sells quarter of the consigned inventory during the month for 1.000 TL in credit card payments, and earns a 10% commission
on these sales, totaling 100 TL According to the consignment arrangement, X Company must also reimburse Consumer Products for
the 2% credit card processing fee, which is 20 TL (1000× 2%).
Ias 2 Inventories
The results of this sale are summarized as follows:
Sales price to Carty’s customers on behalf of X Company 1.000 TL
Less: Amounts due to Consumer Product in accordance with arrangement
10% sales commission 100 TL
Reimbursement for credit card processing fee 20 TL
Due to X Company 880 TL
Upon receipt of the monthly sales report from Consumer Products, X Company records the following entries:
DR
CR
120
Accounts receivable
1.060
620
Cost of goods sold
20
760
Commission expense
100
600 Sales
1.000
391 Calculated VAT
180
To record the sale made by CaRty Inc. acting as agent of X Company, the commission earned by Carty Inc. and the
credit card fee reimbursement earned by Carty Inc. in connection with the sale.
DR
CR
620 Cost of goods sold
562.5
152 Consignment out inventory 562.5
To transfer the related inventory cost to cost of goods sold, including half the original nventory cost and half the cost of
the shipment to Consumer Product [(2.000 + 250=2,250) × 1/4 = 562.5
Ias 2 Inventories
Example of Expenses Relating Inventories
Ay A.Ş purchases chocalates from various countries
and exports them to Europe. Ay A.Ş has
incurred these expenses during 2010:
(a) Cost of purchases (based on vendors’ invoices)
(b) Trade discounts on purchases
(c) Import duties
(d) Freight and insurance on purchases
(e) Other handling costs relating to imports
(f) Salaries of accounting department
(g) Brokerage commission payable to indenting
agents for arranging imports
(h) Sales commission payable to sales agents
(i) After-sales warranty costs
Which constitute the cost of inventories of Ay A.Ş ?
A, B, C ,D E, G

Net Realizable Value
Inventories are written down to net realizable
value (NRV) on the basis that assets should not
be carried in excess of amounts likely to be
realized from their sale or use. Write-down of
inventories becomes necessary for several
reasons;
1- inventories may be damaged
2- become obsolete
3- their selling prices may have declined after
year-end (or period-end).
Inventories are usually written down to their
NRV on an item-by-item basis.