Introduction

Anyone who studies International Accounting Standards will be aware of the dearth of materials available to help them. The International Accounting Standards Board (IASB) has published the Standards themselves, of course, and they have also published a book called IAS Explained which, when read along side the Standards is an excellent text.

There is also the excellent www.iasplus.com site that contains a vast amount of information on the Standards including summaries of every Standard and up to date news from the IASB and other sources.

This page takes an overview of IAS 2: Inventories. It does so with a mixture of questions and comment and direct references to the Standard itself. The solutions to the questions on this page are available to anyone who asks: just email me and I'll send them by return ... don't forget to tell me what you want!! Whilst I have prepared all of the solutions to these questions, I have used IAS materials for some of them and I can't put them here because to do so could infringe the IASB's copyrights.

The layout of this page is that I have worked my way through the Standard from start to finish exploring the most important paragraphs as I go. It will be most useful if you have the Standard in front of you as you work your way through this page.

Questions

1 Complete the following extract from IAS 2: Inventories:

This Standard should be applied in financial statements prepared in the context of the historical cost system in accounting for inventories other than …

That is, draw up a complete listing of the circumstances in which IAS 2: Inventories is not appropriate.

2 Provide the definition of inventories that is to be found in IAS 2: Inventories.

3 a) Name the International Accounting Standard that deals with Inventories.
b) the IAS referred to in part a) of this question defines the cost of inventories as

The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. (paragraph 7)

i demonstrate what the IAS means by the costs of purchase
ii demonstrate what the IAS means by the costs of conversion
iii demonstrate what the IAS means by other costs incurred
iv what does the phrase incurred in bringing the inventories to their present location and condition mean?

4 a) International Accounting Standard 2 (IAS2): Inventories discusses the allocation of fixed production overheads to the costs of conversion of inventories is based on the normal capacity of the production facilities.

Explain what the Standard means by normal capacity of the production facilities

b) IAS2: Inventories goes on to discuss joint and by products, as follows:

A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by-product. When the costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis.

Illustrate what IAS2: Inventories says about the allocation of fixed costs between joint and by products.

5 In the table below you are given a number of cost headings. You are required to put a cross (×) in the relevant box to indicate which cost is a purchase cost, which cost is a conversion cost and which cost is an "other" cost: as defined by IAS 2: Inventories.

Cost heading	Cost of purchase	Cost of conversion	Other cost
Depreciation of manufacturing machinery
Import duties
Special design cost of a unique product
Fixed production overheads
Factory supervision costs
Hire of a machine for a one off product
Rebates received
Variable production overheads
Trade discounts received
Transporting inventory from supplier to customer
Direct labour costs associated with production
Purchase price

6 In line with IAS 2: Inventories, put a cross (×) in the Excluded? column in the table below to indicate the costs that are to be excluded from the cost of inventories.

	Excluded?
Abnormal amounts of wasted materials
Administrative overheads that do not contribute to bringing inventories to their present location and condition
Depreciation of manufacturing machinery
Direct labour costs associated with production
Purchase price
Rebates received
Selling costs.
Special design cost of a unique product
Storage costs, unless those costs are necessary in the production process prior to a further production stage
Variable production overheads

7 Evaluate the cost of materials from the following data. You should prepare a schedule divided into the following sections

cost of purchase

cost of conversion

other costs

Please note, not all costs are relevant.

8 State the factors that standard costs take into account when measuring inventory costs, according to IAS 2: Inventories.

9 a) State the conditions under which the retail method of inventory valuation is most appropriately used?
b) Describe how the retail method of inventory valuation is applied.

10 The following is taken from IAS 2: Inventories:

Cost Formulas

19. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by using specific identification of their individual costs.

Explain and illustrate with an example of your own the inventory cost measurement implications of this instruction.

11 a) State the Benchmark Treatments for measuring the cost of inventories according to IAS 2: Inventories?
b) Using simple examples of your own, demonstrate how the methods you have named in your answer to part a) of this question work.

12 a) At the time of writing, there is an allowed alternative treatment: state the allowed alternative treatment for measuring the cost of inventories.
b) Demonstrate how the allowed alternative treatment might work using an example of your own.

13 a) Discuss the term Net Realisable Value mean in the context of the valuation of inventories?
b) Illustrate the way in which the net realisable value method works by using an example of your own.

14 IAS 2: Inventories lists what the financial statements should disclose vis a vis inventories held at the date of the balance sheet. List those disclosure requirements.

15 List possible classification categories for inventories that might appear on an organisation's balance sheet.

© Duncan Williamson
4 August 2002