Inventories
Inventory is defined as:
An asset that is:
• held for sale in the ordinary course of business; or
• 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
CLASSIFICATION OF INVENTORY
Determined by:
• Inventory purchased for sale
• Or used in the process of manufacture
in the ordinary course of business!
CATEGORIES OF INVENTORY
Inventory categories differ according to business type:
̶ Retailer - merchandise
̶ Manufacturer - Raw materials
- Work in progress
- Finished goods
- Consumable stores
̶ Service provider - Consumable stores (used in e manufacturing process or to provide a service).
RECOGNITION OF INVENTORY
Recognition of inventory:
→ IAS 2 does not explain when inventory should be recognised
→ Reference should be made to conceptual framework on the recognition of an asset
→ Recognise inventory when the definition of an asset and recognition criteria is met
→ Classified as inventory when it meets the definition of inventory.
COST OF INVENTORY
Includes:
1. Purchase cost (excluding reclaimable taxes)
2. Conversion costs (Direct labour and overheads, fixed and variable)
3. Other costs to bring the inventory into its current location and condition
1. PURCHASE PRICE
Transport costs , inwards
Transaction taxes e.g. vat Import tax (non Excluding ALL discounts
The actual purchase cost + (to bring inventory to the
(not claimable) + recoverable) + received.
location of sale)
2. CONVERSION COSTS
Direct manufacturing cots-
Cost for converting raw involved directly in the
Can be direct or indirect
materials into finished goods manufacturing process e.g.,
labor
Indirect manufacturing costs-
Not direct but necessary for
manufacturing to take place
e.g. Overheads (fixed and
variable) e.g. electricity and
depreciation
3. OTHER COSTS
Other costs incurred in relation to inventory should be capitalised only if:
Incurred in bringing the inventory to its present location and condition
NB: Transport outwards is expensed and not included in the cost of inventory.
INVENTORY SYSTEMS
PERIODIC
Continually update the ledger accounts with the purchase of inventory but not sale.
Physical stock count at the end of the period to determine closing inventory.
Purchases accounts- records the cost of all stock purchases
Inventory account- records inventory balance after a stock count-usually done at year end
Cost of sales account- determine COS by comparing purchases account and inventory balance:
COS= OS + Purchases – Closing Stock
Stock loss not specifically identifiable it is hidden in cost of sales.
Only specifically identifiable stock loss is expensed separately.
PERPETUAL
Continually update the ledger accounts with the purchase of inventory and each inventory sale.
Uses real time processing- system updates automatically when there is a sale of inventory.
Uses an inventory and cost of sales account.
Purchase of inventory is recorded directly into the inventory account.
Balance of the inventory can be determined at any day.
Can detect missing stock by reconciling inventory balance as per the system to the actual records.
COST FORMULA
Specific identification method (ignore)
COST FORMULA
First-in-first-out (FIFO)
Weighted average method
WEIGHTED AVERAGE METHOD
Average price is recalculated with each purchase transaction
Average price:
Total purchases/Number of units purchased
FIRST-IN-FIRST-OUT (FIFO) METHOD
Oldest sold first
Costs allocated to items in a specific purchase transaction
Assume closing stock/inventory is latest purchases/production
SUBSEQUENT MEASUREMENT
Inventory is valued at lower of Cost or Net realizable value (estimated selling price in the ordinary course of
the business)
If NRV is less than cost, write down inventory to NRV.
