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Inventory

Inventory. Accruals. requires that costs and revenues are recognised in the accounts when incurred or earned – not when the money is received or paid. Closing inventory NOT included in cost of sales as it goes into next accounting period. Valuation of Inventory IAS 2.

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Inventory

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  1. Inventory

  2. Accruals • requires that costs and revenues are recognised in the accounts when incurred or earned – not when the money is received or paid. • Closing inventory NOT included in cost of sales as it goes into next accounting period

  3. Valuation of Inventory IAS 2 • The lower of Cost or Net Realisable Value NRV • Cost and NRV are done for each item and compared to determine the lower

  4. COST • Cost includes • Cost of purchase • Materials, import duties, freight • Less Trade Discount (not settlement discount) • Cost of conversion • Direct material, direct labour, direct expense • Production overheads – L&H, Rent, Rates, etc

  5. COST working • Item A • Cost of purchase €2000 • Less Trade Disc €100 • Cost of conversion €50 • Total Cost €1950

  6. NRV The revenue expected to be earned when the goods are sold, less and further costs Selling Price • Less Trade Discount on Sale • Less further costs of completion • Less Marketing, Distribution, Selling Costs = NRV

  7. NRV working Item A Selling Price €3500 • Less Trade Discount on Sale € 50 • Less further costs of completion € 120 • Less Marketing, Distribution, Selling Costs €40 = NRV €3290

  8. IAS 2 Rules for Valuing Inventory • First In First Out FIFO • Average Cost AVCO • Periodic Weighted Average • Continuous Weighted Average

  9. FIFO Total Purchases = 300 units Total Sales = 180 units Closing Inventory = 120 units Closing Inventory = 120 units Assumed to be part of the last purchase Valued at €6 per unit

  10. FIFO Purchases 1200 – sales 700 = 500 units closing 400 x 3.20 = 1280 100 x 2.60 = 260

  11. AVCO – Periodic Weighting Doesn’t consider dates of Purchases or Sales = Assume all on last date of period Purchases 300 – sales 180 = 120 units closing

  12. AVCO – Continuous Weighting The average price is updated after every transaction Sale unit cost = inventory to date / units to date Cost of Sales = 50 + 967 = 1017

  13. AVCO – Continuous Weighting The average price is updated after every transaction Sale unit cost = inventory to date / units to date Cost of Sales = 967

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