IND AS 2 Inventory Measurement Quiz

Study Notes

Inventory Measurement under IND AS 2

Inventory is measured at the lower of cost and net realizable value (NRV).
Cost comprises all costs of purchase, conversion, and other costs incurred in bringing the inventory to its present location and condition.
Cost includes, but is not limited to, purchase price, import duties, taxes, and transportation costs.
Conversion costs include direct labor, factory overhead, and other manufacturing costs.
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.
If the cost of inventory exceeds the NRV, the inventory is written down to its NRV in the financial statements.
This write-down is recognized as an expense in the period in which the inventory is written down.

Different Inventory Cost Formulas

Specific identification method: Matches the cost of goods sold with the actual cost of the specific goods sold. Suitable for unique or high-value items.
First-in, first-out (FIFO): Assumes the first units purchased are the first ones sold. Provides a more current inventory valuation. Useful in rapidly changing price environments.
Weighted-average cost: Calculates an average cost per unit over the period by dividing the total cost of goods available for sale by the number of units available for sale. More appropriate for mass-produced items.

Considerations for Inventory Valuation

Inventories are recognized as an asset when purchased, initially measured at cost. This is the key to understanding inventory valuation.
Costs associated with bringing inventory to its present location and condition are included in the cost of inventory, calculated using the inventory costing method.
Any impairment losses to inventory are recognized as inventory write-downs and reported as expenses.
Inventories are classified as current assets and recorded at the lower of cost and net realizable value.
Goods held on consignment are not included as inventory.
Inventory is presented in the statement of financial position at cost—critical for financial reporting comprehension.

Major Differences Between Cost Formulas and NRV

Costing formulas (FIFO, LIFO, weighted average) focus on calculating the cost of the inventory.
NRV focuses on the future selling price of the inventory.
The lower of cost and NRV is critical for preventing overstatement of inventory on the balance sheet.
NRV is an estimate; caution is needed in applying it to inventory valuation, and its impact on financial statements must be understood.

Disclosure Requirements

The entity must disclose:
- The accounting policies used for inventory measurement.
- The carrying amount of inventory and the amount of any inventory write-downs.
- The total amount of inventory written down.
- A summary of the circumstances causing the write-down.
- The method used to determine the NRV.
These disclosures help stakeholders assess the accuracy and appropriateness of inventory reporting.

Practical applications and examples

A company manufacturing furniture would use the specific identification method if each piece is unique and high-value.
A clothing retailer might use FIFO to reflect the flow of goods accurately.
Retailers of highly perishable goods favor FIFO or weighted-average cost methods.
The lower of cost and net realizable value (NRV) is crucial for accurate inventory valuation.

Inventory Write-Down Process

The inventory write-down is determined based on periodic assessment of the inventory's NRV.
Inventory write-downs are recognized as an expense in the period when NRV falls below cost.
Financial reporting of write-down expenses allows stakeholders to understand the impacts on the business.
Inventory balance adjustments are documented and reported appropriately under accounting rules.

Description

Test your knowledge on inventory measurement under IND AS 2. This quiz covers the key concepts, including cost components, net realizable value, and inventory write-downs. Assess your understanding of the inventory costing methods and their implications in financial statements.