Inventory is one of the main items in the financial statements, and as such many time questions are appearing related to it in your final exam.
Inventories are of following types:
- Raw materials
- Work in process
- Consumable stores and spares
- Finished goods
It is appearing in balance sheet as current assets and in cost of goods sold (credit side on income statement) in income statement. Increase or decrease in inventories will directly have impact on current ratio and profit or loss of a company.
Inventory is measured at the lower of cost and net realizable value (NRV). Note that inventory includes land held for resale but does not include financial instruments.
NRV is the estimated selling price in the ordinary course of business less: (1) the estimated costs of completion; and (2) the estimated costs necessary to make the sale.
Cost should include all:
- costs of purchase (including taxes, transport, and handling) net of trade discounts received
- costs of conversion (including fixed and variable manufacturing overheads) and
- other costs incurred in bringing the inventories to their present location and condition
Inventory cost should not include:
- abnormal waste
- storage costs
- administrative overheads unrelated to production
- selling costs
LIFO cost flow assumption is not permitted under IFRS.