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Memo Q1 - Inventory IAS 2

The document outlines the financial position and income statement of M Ltd for the year ending 31/12/2020, focusing on inventory measurement according to IAS2. It details the components of inventory, including raw materials, work-in-progress, and finished goods, along with their respective calculations. Additionally, it discusses the accounting policy for inventory valuation based on FIFO and the recognition of write-downs to net realizable value in the income statement.

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16 views9 pages

Memo Q1 - Inventory IAS 2

The document outlines the financial position and income statement of M Ltd for the year ending 31/12/2020, focusing on inventory measurement according to IAS2. It details the components of inventory, including raw materials, work-in-progress, and finished goods, along with their respective calculations. Additionally, it discusses the accounting policy for inventory valuation based on FIFO and the recognition of write-downs to net realizable value in the income statement.

Uploaded by

ayabongasikhotshi1505
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial Accounting

2A / Accounting 2A
MFAC62112 /
MACC62116
2025 Class
Syllabus Theme 2:
INVENTORY (IAS2)
MEMO CLASS PRACTICE
QUESTION 1
Inventory Measurement
at the end of financial year
(Class Practice Question)

M Ltd
Financial Position at 31/12/2020

Assets
Current assets Note R
Inventory 2 200 600
Inventory Measurement
at the end of financial year
(Class Practice Question)

M Ltd
Income Statement for the year ended at 31/12/2020

R
Revenue 600 000
Cost of Inventory (Cal 5) (458 400)
Gross profit 141 600
Inventory Measurement
at the end of financial year
(Class Practice Question)

Notes to the financial statement for the year ended


31/12/2020

1. Accounting policy
1.1. Inventory
Inventory is valued at a lower cost (i.e. net
realizable value). Cost is determined on a FIFO basis
Inventory Measurement
at the end of financial year
(Class Practice Question)

Notes to the financial statement for the year ended


31/12/2020

2. Inventory
Inventory consists of:
Raw materials R40 600
Work-in-progress R85 000
Finished goods R75 000
R200 600
Inventory Measurement
at the end of financial year
(Class Practice Question)
Calculations:

1. Raw materials
Op balance R60 000
Purchases R195 000
Clo balance (40 600)
Cost of Raw materials R214 400
[Transfer to Work-in-progress (WIF)]
Inventory Measurement
at the end of financial year
(Class Practice Question)
Calculations:
2. Work-in-progress (WIP):
Opening balance R30 000
Transfer from raw materials(cost of raw material) R214 400
Variable production cost (R2x65000 units) R130 000
Fixed production cost (R1,5x65000 units-
considered actual units because of WIP) R97 500
(Fixed production cost R150000/Normal capacity
100000 units = R1.5 per unit)
Closing balance (94 500)
Cost of WIP R377 400
(Transfer to finished goods )
Inventory Measurement
at the end of financial year
(Class Practice Question)
Calculations:

3. Finished goods
Op balance R94 000
Transfer from WIP (cost of WIP) R377 400
Clo balance (80 000)
Cost finished goods R391 400

(Transfer to cost of inventory )


Inventory Measurement
at the end of financial year
(Class Practice Question)
Calculations 5: Cost of inventory R
Cost of finished goods 391 400
Under recovery of fixed production cost 52 500
(100 000 units – 65 000 units) x R1,5
Inventory written off (written down to NRV) 14 500
[(cost 40 600 + 94 500 + 80 000) – (NRV 40 600 + 85 000 + 75 000) =
14 500]
[When NRV is lower than the cost price, the difference between
NRV and cost price should be expensed in the income statement.
The write-downs to the NRV in the income statement should be
recognized as part of the cost of sales)
[Written off /Written down: Cost (only closing values) less NRV]
COST OF THE INVENTORY 458 400

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