Inventories Part 2 Notes

Inventories- Part 2

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Definition

Inventories mean goods and stocks which are purchased or produced for the purpose of resale. it is one of the organization's most important current assets.

In other words

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets are known as inventories.

Inventory consists of:

• goods purchased for resale

• consumable stores (such as oil)

• raw materials and components (used in the production process)

• semi finished goods (usually called work in progress – WIP)

• finished goods (manufactured by the business).

Why is it important?

Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

Lecture Notes

There are two systems of recording inventory:

1. Periodical

2. Perpetual

Periodic inventory is a system of inventory in which updates are made on a periodic basis

In a periodic inventory system no effort is made to keep up-to-date records of either the inventory or the cost of goods sold. Instead, these amounts are determined only periodically - usually at the end of each year. This physical count determines the amount of inventory appearing in the balance sheet.

perpetual inventory or continuous inventory describes systems of inventory where information on inventory quantity and availability is updated on a continuous basis

this is a system for inventory that records the sale or purchase of inventory in near real-time.

Perpetual inventory provides a highly detailed view of changes in inventory and allows real-time reporting of the amount of inventory in stock

There are three main inventory valuation methods under perpetual system:

– FIFO

– LIFO

– Weighted average cost(AVCO).

1. First In First Out – FIFO assumes that materials are issued out of stock in the order in which they were delivered into inventory.

2. Last In First Out – LIFO assumes that materials are issued out of inventory in the reverse order to which they were delivered into inventory.

3. Weighted average cost – AVCO values all items of inventory and issues at an average price. The average price is calculated after each receipt of goods. The average price is calculated by dividing the total purchase costs to date by the total units received to date.

US GAAP allows all the above valuation methods of inventory while IFRS only allows FIFO and AVCO.

Measurement of Inventories in Financial Statements:

Under IFRS (IAS 2 Inventories)

The key requirements of IAS 2 Inventories are:

• Inventories are valued at the lower of cost and net realisable value.

• Cost includes costs of purchase, costs of conversion and other costs incurred in bringing the inventory to its present location and condition.

• Costs which must be excluded from the cost of inventory are:

– selling costs

– storage costs

–...

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