Write a short memorandum to the Managing Director of a newly established manufacturing company explaining IAS2 (Accounting for Inventories)

Question1

(Part 1) Memorandum to the managing directors of the company

Meaning of Inventory: -

Inventories are assets: (a)which are held for sale in the ordinary course of business or

(b) which are to be used in the process of production for such sale; or

(c) which are in the form of materials or supplies to be consumed in the production process or in the rendering of services.

To check the proper valuation the standard’s basic rule is that inventories are measured at the lower of cost and net realisable value,

Net realisable value means ‘the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale’.

What is to be included in inventory Cost

1.The costs attributed to inventories under IAS 2 comprise all costs of purchase, costs of conversion and other costs incurred to bring the inventories to their present location and condition.

a) Costs of purchase it include import duties and taxes which cant be recovered, transport, handling and other costs directly attributable to the inventories. Trade discounts and similar rebates are required to be deducted from the costs attributed to inventories

b. Costs of conversion:- Costs of conversion include direct costs such as direct labour and materials, as well as an allocation of fixed and variable production overheads. It must be remembered that the inclusion of overheads is not optional. Overheads may comprise indirect labour and materials or other indirect costs of production.

c Other costs :- It includes included in inventories only to the extent that they bring them into their present location and condition. Often judgement will be necessary to make this assessment and many of such cost to be rejected some of example are as follows

C (1) Storage and distribution costs Storage costs are not permitted as part of the cost of inventory unless they are necessary in the production process.

C (2) General and administrative overheads IAS 2 specifically disallows administrative overheads that do not contribute to bringing inventories to their present location and condition production process similar to the above.

C (3) Borrowing costs and purchases on deferred terms: - in limited circumstances, borrowing costs are to be included in the costs of inventories.

Methods to calculate Inventory: -

The FIFO method, by allocating the earliest costs incurred against revenue matches actual cost flow and physical cash flow. In any event, even in the case of businesses which do not deal in perishable goods, this would reflect what would probably be a sound management policy.It is most used measure to calculate inventory In practice, the FIFO method is generally used where it is not possible to value inventory on an actual cost basis.

Weighted average cost The weighted average method, which like FIFO is suitable where inventory units are identical or nearly identical, it involves the computation of an average unit cost by dividing the total cost of units by the number of units that were Purchased The average unit cost then has to be revised with every receipt of inventory, or alternatively at the end of predetermined periods.

C Last-in, first-out (LIFO) LIFO, as its name suggests, is the opposite of FIFO and assumes that the most recent purchases or production are used first it is not approved by IAS2

IAS 2 Approves only First two method FIFO and weighted average.

Part 2

1. Cost or NRV whichever is lower

COST EURO 950

                NRV 1050

So value to be included Euro 950.

2. Sale on approval basis is not sale so the amount to be recorded as Sale on approval basis in the financial statement

3.The amount due to loss will not be included while calculation closing entry.

Part 3

Grant Related to Asset

Grant that are related to assets means that to be received to an entity when it qualifying for them should purchase, construct or otherwise acquire long-term assets should be presented in the statement of financial position either

It can set the Grant amount received as deferred income, that to be recognised as income on a systematic and rational basis over the useful life of the asset

Or either it by deducting the grant in arriving at the carrying amount of the asset, in which case the grant is recognised in profit or loss as a reduction of depreciation.

Grant Related to Income

   Grant related to income to be shown as

As credit in income statement under the general heading of Other Income or as a deduction in reporting of the related expenses

IAS 1 is generally a supporter of second alternative while reporting as it gives a better presentation and a fair view

                Non-monetary Grants Non monetary garnts are those grants which are not in monetary form but in the form of Land and other resources which will be use to organistaion

Treatment of such grant to be done to show the asset to show the amout at fair value in the financial statement or even the amount can be shown at a nominal amount but once the option chose the same will be apply to all Non monetary assets.