Which of the following is not included in the initial measurement of inventories
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Editorial Note Related commentary and examples in Navigate IFRS Accounting Issue date IAS 2 Inventories (2003) was originally issued in December 2003, effective from 1 January 2005. All effective amendments
issued since that date are reflected in the text of the standard. Detailed editorial notes set out the history of major amendments. Key amendments The standard incorporates the following amendments that are already effective: •IFRS 16 Leases (January 2016), effective for annual reporting periods beginning on or after 1 January 2019; •IFRS 9 Financial Instruments (July 2014), effective for annual reporting periods beginning on or after 1 January 2018; To subscribe to this content, simply call 0800 231 5199 We can create a package that’s catered to your individual needs. Or book a demo to see this product in action.
The amounts reported as ‘inventories’ and ‘cost of goods sold’ are two significant items that can appear on a company’s financial statements, especially for manufacturing and merchandising companies. Some costs are included in the asset ‘inventories,’ while others are recognized as expenses on the income statement in the period in which they are incurred. The inclusion of costs in inventory defers their recognition as an expense on the income statement until the inventory is sold. Additionally, a company that includes costs in inventory that should rightfully be expensed will overstate the profitability reported on its income statement, as well as create an overstated inventory value on the balance sheet. Both US GAAP and IFRS stipulate that the costs that are to be included in inventories are “all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.” Costs of purchase include the purchase price, import and tax-related duties, transport costs, insurance during transportation, handling costs, and other costs that are directly attributable to the acquisition of finished goods, materials, and services. The costs of purchase, as well as the price paid, are reduced by trade discounts, rebates, and similar items. Costs of conversion include all costs that are directly related to the units produced, for example, direct labor costs, and fixed and variable overhead costs. Costs Recognized as ExpensesUnder both IFRS and US GAAP, the costs that are excluded from inventory include abnormal costs that are incurred as a result of material waste, labor or other production conversion inputs, storage costs (unless required as part of the production process), and all administrative overhead and selling costs. These excluded costs are treated as expenses and recognized on the income statement during the period in which they are incurred.
AboutIAS 2 provides guidance for determining the cost of inventories and the subsequent recognition of the cost as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Inventories are measured at the lower of cost and net realisable value. Net realisable value is 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. The cost of inventories includes all costs of purchase, costs of conversion (direct labour and production overhead) and other costs incurred in bringing the inventories to their present location and condition. The cost of inventories is assigned by:
When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. Standard historyIn April 2001 the International Accounting Standards Board (Board) adopted IAS 2 Inventories, which had originally been issued by the International Accounting Standards Committee in December 1993. IAS 2 Inventories replaced IAS 2 Valuation and Presentation of Inventories in the Context of the Historical Cost System (issued in October 1975). In December 2003 the Board issued a revised IAS 2 as part of its initial agenda of technical projects. The revised IAS 2 also incorporated the guidance contained in a related Interpretation (SIC‑1 Consistency—Different Cost Formulas for Inventories). Other Standards have made minor consequential amendments to IAS 2. They include IFRS 13 Fair Value Measurement (issued May 2011), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014), IFRS 9 Financial Instruments (issued July 2014) and IFRS 16 Leases (issued January 2016). What is the initial measurement of inventories?Inventories are measured at the lower of cost and net realisable value. Net realisable value is 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.
Which of the following is not included in the cost of inventory?Storage cost is not included in the cost of inventory.
Which of the following will not be included in inventories?Change in sales during the year is not a part of the inventory.
Which of the following is included in the inventories?Inventories include raw materials, component parts, work in process, finished goods, packing and packaging...
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