The objective of IAS 2 Inventories is to prescribe the accounting treatment for inventories and provide guidance for measuring and valuation of inventories. It determines the cost of inventories and subsequent recognition as an expense, including any write-down to net realisable value.
Required:
i) Explain Inventories. (3 marks)
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Inventories, per paragraph 6 of IAS 2 are assets that are:
- Held for sale in the ordinary course of business
- 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. Inventories per IAS 2 comprise a) Merchandise b) Production Supplies c) Materials d) Work in Progress e) Finished Goods authorized for issue.
ii) Explain how inventories are measured and valued in the financial statements in accordance with IAS 2. (3 marks)
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Inventories are measured at the lower of Cost And Net Realisable Value (NRV)
Cost should include all: [IAS 2.10]
- costs of purchase (including taxes, transport, and handling) net of trade discounts received,
- costs of conversion (including fixed and variable manufacturing overheads) and
- other costs incurred in bringing the inventories to their present location and condition.
Net Realisable Value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale.