Inventory
This domain tests inventory valuation under IAS 2, cost of sales, and the effect of write-downs. Exam questions ask for the value of closing inventory, the write-down required, or the treatment of costs such as delivery, storage and administration.
Core rules
- Inventory is measured at the lower of cost and net realisable value (NRV).
- Cost includes purchase price, import duties, transport and conversion costs; trade discounts are deducted.
- Costs excluded from inventory include abnormal waste, most storage costs, administration overheads and selling costs.
- NRV is estimated selling price less costs to complete and costs to sell.
- Cost formulas under IAS 2 include FIFO and weighted average cost; LIFO is not permitted.
- A write-down is an expense; reversals are limited to the original write-down.
Worked example
An item costs 100. It can be sold for 120, but selling costs are 30. NRV = 120 - 30 = 90. Inventory is valued at 90, the lower of cost and NRV, and a write-down of 10 is charged to profit or loss. If 500 units are held, cost is 50,000 and NRV is 45,000, closing inventory is 45,000 and the write-down is 5,000. The write-down reduces profit and the carrying amount of current assets.
Traps
- Using selling price without deducting costs to sell.
- Including administration or selling costs in inventory cost.
- Using LIFO, which IAS 2 prohibits.
- Reversing a write-down above the original cost.