Chapter 2 - Inventories

• PAS 2 defines inventories as assets that is;

  1. Held for sale in the ordinary course of business
  2. in the process of production for sale
  3. in the form of materials or supplies to be consumed in the production process
• Goods in Transit terms of shipment and who got the control

  1. FOB shipping point or FOB origin or FOB seller - owned by buyer
  2. FOB destination or FOB buyer - owned by the seller, title will only transfer when the materials reach its location
• Goods on Consignment

  Out on consignment - owned by consignor, POV of consignor

  Held on consignment - pov of consignee, inventory of consignor
• Goods used as collateral are owned by the borrower not the lender. The amount of goods used as collateral should be disclosed.
• Inventories are required to be measured at the lower of cost and net realizable value (NRV)
• Items included in the cost of inventories

  1. Cost of purchase
  2. Cost of conversion
  3. Other Costs
• What do you call to the costs incurred to convert materials into finished goods?

  cost of conversion
• Conversion costs includes;

  1. Direct Labor
  2. FOH - indirect materials, indirect labor and depreciation and maintenance of factory buildings, equipment, and right of use assets used in the production
• What do you call the production expected to be achieved on average over a number of periods or seasons under normal circumstances considering the loss of capacity resulting from planned maintenance?

  Normal Capacity
• For the inventories purchased with deffered settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense
• Items not included in cost of inventories

  1. Unallocated overhead
  2. Abnormal amount of wasted
  3. Storage costs
  4. Administrative Overheads
  5. Selling cost
  6. Foreign exchange differences
• What are the three cost formulas?

  Specific Identification

  FIFO

  Weighted Average
• What cost formula where specific costs are attributed to identified inventory and used for items that are not ordinarily interchangeable?

  Specific Identification
• Formula of specific identification

  unit on hand * specific unit cost
• Formula of FIFO

  units on hand * unit cost of the latest purchase = ending inventory, fifo periodic
• Formula of COGS in FIFO

  Numbers of sales * Unit cost of first purchases = cost of sales, FIFO periodic
• Formula of Weighted Average

  WAUC = total cost of GAS/ tota units available for sale

  Ending Inventory = Units on hand * WAUC
• It is the estimated selling price less estimated costs of completion and the estimated costs necessary to make the sale


  NRV
• NRV refers to the net amount that an entity expects to realise from the sale of the inventory. NRV is entity - specific value.
• It is the reduction from the list price given by the seller to the buyer and is used by the seller to generate more sale. This is not accounted for separately.

  Trade Discounts
• It is the deduction from the invoice price by the seller to the buyer to encourage prompt payment. This can be accounted using gross or net method

  Cash Discount
• It is a contract to buy goods at a fixed price at a specified future date


  Purchase commitment
• What do you call to the contracts under which neither party has performed its obligation?


  Executory Contracts
• It is a contract in which the unavoidable cost of meeting the obligations under the contract exceed the economic benefit expected to receive to it

  Onerous Contract