PAS 2
INVENTORIES
Espiritu, Wayne Mikel Nicolo
Lalog, Arvin Dexter
Cabe, Joezele
Seechung, Khyle Mikhale
LEARNING
OBJECTIVES:
Define Inventories.
Measure inventories and apply
the cost formulas.
State the accounting for
inventory write-down and the
reversal thereof.
INVENTORIES
Inventories are assets:
a. Held for sale in the ordinary course of business
(Finished goods);
b. In the process of production for such sale
(Work In Process); or
c. In the form of materials or supplies to be
consumed in the production process or in the
rendering of services (Raw materials and
Manufacturing supplies).
FINANCIAL STATEMENT
POSITION
All items that meet the definition of inventory are presented
on the statement of financial position as one line item under
the caption "Inventories."
The breakdown of this line item (as finished goods, WIP and
Raw materials) is disclosed in the notes.
Inventories are normally presented in a classified statement
of financial position as current assets.
MEASUREMENT
•Inventories are measured at the lower of cost and Net Realizable
Value (NRV)
The cost of inventories comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to
their present location and condition.
• Net realizable value (NRV) 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.
Cost
The cost of inventories comprises the following:
a. 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.
b. Conversion costs
these refer to the costs necessary in converting raw materials into finished
goods. Conversion costs include the costs of direct labor and production
overhead.
c. Other costs necessary in bringing the inventories to their present location
and condition.
The following are excluded from the cost of inventories and are expensed in
the period in which they are incurred:
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 (e.g., the storage costs of partly finished
goods may be capitalized as cost of inventory, but the storage costs of
completed goods are expensed);
c. Administrative overheads that do not contribute to bringing inventories to
their present location and condition; and
d. Selling costs (e.g., freight out and advertisement costs). (PAS 2.16)
When a purchase, transaction effectively contains a financing element, such
as when payment of the purchase price is deferred, 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.
COST FORMULAS
1.SPECIFIC IDENTIFICATION
This shall be used for inventories that are not ordinarily
interchangeable (i.e, those that are individually unique) and
those that are segregated for specific projects .
Under this formula, specific costs are attributed to
identified terms of inventory. Accordingly, cost of sales
represents the actual cost of the specific items sold, while
ending inventory represents the actual costs of the specific
items on hand.
COST FORMULAS
2. FIRST IN, FIRST OUR (FIFO)
Under this formula, 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.
Accordingly, cost of sales represents costs from earlier
purchases, while the cost of ending inventory represents
costs from the most purchases
COST FORMULAS
3. WEIGHTED AVERAGE
Under this formula, 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 .
The average may be calculated on a periodic basis, or as each
additional purchase is made, depending upon the
circumstances of the entity.
COST FORMULAS
The cost formulas refer to “cost flow assumptions,” meaning
they pertain to the flow of costs (i.e, from inventory to cost
of sales) and not necessarily to the actual physical flow of
inventories. Thus, the FIFO or Weighted Average can be used
regardless of which inventory item is physically sold first.
The same cost formula shall be used for all inventories of a
similar nature and use. Different cost formulas may be used
for inventories with different nature or use. however, a
difference in geographical location of inventories, by itself, is
not sufficient to justify the use of different cost formulas.
Net Realizable Value (NRV)
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. (PAS 2.6)
NRV is different from fair value. “Net Realizable Value refers to the net
amount from that an entity expects to realize from the sale of inventory
in the ordinary course of business. Fair value sale of inventory in the
ordinary course of business. Fair value reflects the price at which an
orderly transaction to sell the same inventory in the principal (or most
advantageous) market for that inventory would take place between market
participants at the measurement date.
Net Realizable Value (NRV)
WRITE DOWN INVENTORIES
Inventories are usually written down to net realizable value on an item by item
basis.
If the cost of an inventory exceeds its NRV, the inventory is written down to
NRV, the lower amount. The excess of cost over NRV represents the amount of
write-down.
REVERSAL OF WRITE-DOWNS
The amount of reversal to be recognized should not exceed the amount of the
original write-down previously recognized.
RECOGNITION AS AN EXPENSE
The carrying amount of an inventory that is sold is charged as expense
(i.e., cost of sales) in the period in which the related revenue is
recognized. Likewise, the write-down of inventories to NRV and all
losses of inventories are recognized as expense in the period the write-
down or loss occurs.
"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." (PAS 2.34)
RECOGNITION AS AN EXPENSE
Inventories that are used in the construction of another asset are
not expensed but rather capitalized as the cost of the constructed
asset. For example, some inventories may be used in constructing a
building. The cost of those inventories is capitalized as the cost of
the building and will be included in the depreciation of that building.
DISCLOSURES
Accounting policies adopted in measuring inventories, including the cost formula
used;
Total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity;
Carrying the amount of inventories carried at fair value less costs to sell;
Amount of inventories recognized as an expense during the period;
Amount of any write-down of inventories recognized as an expense in the period;
Amount of any reversal of write-down that is recognized as a reduction in the
amount of inventories recognized as expense in the period;
Circumstances or events that led to the reversal of a write-down of inventories;
and
Carrying an amount of inventories pledged as security for liabilities. (PAS 2.36)
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