Inventory

Accruals

• requires that costs and revenues are recognised in the accounts when incurred or earned – not when the money is received or paid.

• Closing inventory NOT included in cost of sales as it goes into next accounting period

Valuation of Inventory IAS 2

• The lower of Cost or Net Realisable Value NRV• Cost and NRV are done for each item and

compared to determine the lower

COST

• Cost includes – Cost of purchase• Materials, import duties, freight• Less Trade Discount (not settlement discount)

– Cost of conversion• Direct material, direct labour, direct expense• Production overheads – L&H, Rent, Rates, etc

COST working

• Item A• Cost of purchase €2000• Less Trade Disc €100• Cost of conversion €50• Total Cost €1950

NRV

The revenue expected to be earned when the goods are sold, less and further costs

Selling Price– Less Trade Discount on Sale– Less further costs of completion– Less Marketing, Distribution, Selling Costs

= NRV

NRV working

Item ASelling Price €3500– Less Trade Discount on Sale € 50– Less further costs of completion €

120– Less Marketing, Distribution, Selling Costs €40

= NRV €3290

IAS 2 Rules for Valuing Inventory

• First In First Out FIFO• Average Cost AVCO– Periodic Weighted Average– Continuous Weighted Average

FIFOUnits € Per Unit

1 June Purchases 100 5

3 June Sales 10

4 June Purchases 200 6

5 June Sales 170

Total Purchases = 300 unitsTotal Sales = 180 unitsClosing Inventory = 120 units

Closing Inventory = 120 unitsAssumed to be part of the last purchaseValued at €6 per unit

FIFOUnits € per Unit

March Sales 700 €6

3 March Purchases 400 €3

8 March Purchases 400 €2.60

18 March Purchases 400 €3.20

Purchases 1200 – sales 700 = 500 units closing400 x 3.20 = 1280100 x 2.60 = 260

Statement of Profit & Loss

Sales 700 x 6 4200

Less Cost of Sales

Open Inventory -

3/3 Purchases 400 x 3 1200

8/3 400 x 2.60 1040

18/3 400 x 3.20 1280

3520

Less Closing Inventory 400 x 3.20 1280

100 x 2.60 260 (1540)

Cost of Sales (1980)

Gross Profit 2220

AVCO – Periodic WeightingUnits € per Unit

1 June Purchases 100 5

3 June Sales 10

4 June Purchases 200 6

5 June Sales 170

Purchases 300 – sales 180 = 120 units closing

Doesn’t consider dates of Purchases or Sales = Assume all on last date of period

Average Purchase Cost

100 x 5 500

200 x 6 1200

Total 300 1700

1700 / 300 5.67

Closing Inventory 120 x 5.67 680

Cost of Sales 180 x 5.67 1021

AVCO – Continuous WeightingUnits € per Unit Value

1 June Purchases 100 5 500

3 June Sales (10) 5 (500/100) (30)

90 450

4 June Purchases 200 6 1200

290 1650

5 June Sales (170) 5.69 (1650/290) (967)

Closing 120 683

The average price is updated after every transaction

Sale unit cost = inventory to date / units to date

Cost of Sales = 50 + 967 = 1017

AVCO – Continuous WeightingUnits € per Unit Value

3 March Purchase 400 3 1200

8 March Purchase 400 2.60 1040

800 2240

18 March Purchases 400 3.20 1280

1200 3520

March Sales 700 2.93 (3520/1200) (967)

Closing 500 1465

The average price is updated after every transaction

Sale unit cost = inventory to date / units to date

Cost of Sales = 967