How do I do inventory IAS 2

If you have a client with complex accounting, such as manufacturing or they are a large retailer, then use your checklists in your resources. 

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Summary

The focus is on the cost of inventory.

Once again, the application of common sense helps tremendously.

Complexities arise when there is manufacturing.

So how do we make sure we are accounting for inventory correctly.

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What is inventory?

Inventories are defined in IAS 2 as assets that are:

1. Held for sale in the ordinary course of business;
2. In the process of production for such sale;
3. In the form of materials or supplies to be consumed in the production process (or in the rendering of services).

Inventory includes goods, property or services in the process of production, but not yet completed (that is, work in progress).

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What should we include in our inventory calculation?

There are usually three types of costs:

1. Cost of purchase - Price, plus import duties and shipping, less discounts and rebates
2. Cost of conversion - for manufacturing, such as direct labour, direct materials and factory overheads
3. Other costs - bringing inventory into the present location and condition

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How do we calculate inventory?

Hopefully there is a system that does it for you. 

First, the cost needs to be found and there are 3 ways:

1. Specific identification
2. FIFO (LIFO is NOT allowed)
3. Weighted average cost

Once the cost is found, you need to measure it at the LOWER of these two:

1. The cost
2. Net realisable value

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What is net realisable value?

The estimated selling price of the inventory (in the ordinary course of business) less the estimated costs of completion and costs of disposal.

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When is inventory "on hand"?

When the business or customer has the legal power to dispose of the inventory.

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