WHAT ARE INVENTORIES?

• Assets
• Held for sale
• In the form of finished goods
• Work-in-progress
• Raw materials

IAS 2

• Inventories are to be valued at lower of cost and net realisable value

WHAT WILL ‘COST’ INCLUDE?

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• All purchasing cost(until good brought to business)
• Net of trade discount received
• Packaging costs

WHAT NOT TO INCLUDE IN THE CALCULATION OF COST OF INVENTORY?

• Storage costs
• Administrative overheads not related to production
• Selling costs
• Interest cost when bought on credit

NET REALISABLE VALUE

• NRV = estimated selling price - estimated cost of completion - estimated costs to sell

EXAMPLE

• Cost of goods = $600
• Sales value = $625
• Selling expenses = $30
• At which value inventory should be included?

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• Cost = ?
• Net realisable value = selling price - costs to sell
• Which is lower?

EXAMPLE 2

• Cost of goods = $15
• Normal selling price = $22
• Modifications costs= $14
• Calculate net realisable value?
• Is cost lower or net realisable value lower?

METHODS OF INVENTORY VALUATION

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• First in first out method
• Average cost method

FIRST IN FIRST OUT METHOD

• Assumed that goods purchased first are first to be issued
• Hence, those remaining in inventories will be price of latest batch bought

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• FIFO perpetual basis = cost of inventory updated each time goods are received and issued

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• FIFO periodic basis, cost of inventory calculated ONCE in a time. ( example at end of financial year )

INVENTORY VALUATION