Q1. Activity 18.1: Inventory Valuation at Lower of Cost and NRV

Background

Topic: Inventory Valuation (IAS 2)

This question tests your understanding of how to value inventory at the lower of cost and net realisable value (NRV), as required by IAS 2. You must consider both the original cost and the expected selling price (after deducting costs to sell) for damaged goods.

Key Terms and Formulas

• Cost: The original purchase price of inventory.

• Net Realisable Value (NRV): The expected selling price minus costs necessary to make the sale.

Formula for NRV:

Step-by-Step Guidance

1. Calculate the total cost of the inventory: Multiply the number of units by the cost per unit.

2. Calculate the NRV per unit: Subtract the repair cost per unit from the expected selling price per unit.

3. Compare the cost per unit and NRV per unit: Determine which is lower.

4. Multiply the lower value (per unit) by the total number of units to get the value to be shown in the financial statements.

Try solving on your own before revealing the answer!

Q2. Activity 18.2: Reasons for NRV Falling Below Cost

Background

Topic: Inventory Valuation (IAS 2)

This question asks you to think critically about other reasons (besides damage or obsolescence) why the net realisable value of inventory might fall below its cost.

Key Terms

• Net Realisable Value (NRV): The estimated selling price less costs to sell.

• Obsolescence: When inventory is no longer useful or saleable at normal prices.

Step-by-Step Guidance

1. Think about market factors that could affect the selling price of inventory (e.g., changes in consumer preferences, new competitors, technological advances).

2. Consider internal business decisions that might lead to selling inventory below cost (e.g., strategic loss leaders, over-purchasing).

3. Reflect on errors or unexpected events (e.g., production mistakes, sudden price drops).

Try brainstorming a few reasons before checking the suggested answers!

Q3. Activity 18.3: Calculating Inventory Write-Down

Background

Topic: Inventory Write-Downs (IAS 2)

This question tests your ability to calculate the write-down required when the NRV of inventory is less than its cost, considering selling expenses and commissions.

Key Terms and Formulas

• Inventory Write-Down: The reduction in inventory value when NRV < cost.

• NRV per unit:

Step-by-Step Guidance

1. Calculate the total cost of inventory: Multiply the number of units by the cost per unit.

2. Calculate the commission per unit: Multiply the selling price by the commission rate.

3. Calculate the NRV per unit: Subtract both the commission and distribution costs from the selling price.

4. Multiply the NRV per unit by the number of units to get total NRV.

5. Subtract total NRV from total cost to find the write-down required.

Try working through the calculations before revealing the answer!

Q4. Activity 18.4: Costs Included in Inventory for a Manufacturer

Background

Topic: Inventory Costing (IAS 2)

This question asks you to identify which costs should be included in the cost of inventory for a manufacturing business.

Key Terms

• Carriage Inwards: Cost of transporting goods to the business (included in inventory cost).

• Factory Overheads: Indirect production costs (often included in inventory cost).

• Carriage Outwards: Cost of delivering goods to customers (not included in inventory cost).

• Storage Costs: May or may not be included, depending on timing and nature.

Step-by-Step Guidance

1. Review each cost and determine if it is necessary to bring inventory to its present location and condition.

2. Recall that costs incurred after inventory is ready for sale (e.g., delivery to customers) are not included in inventory cost.

3. Identify which two costs from the list are directly related to production or acquisition of inventory.

Try to identify the correct costs before checking the answer!

Q5. Activity 18.5: FIFO Inventory Valuation

Background

Topic: Inventory Valuation Methods (FIFO)

This question tests your ability to apply the FIFO (First-In, First-Out) method to determine the value of closing inventory after a series of purchases and sales.

Key Terms and Formulas

• FIFO: Assumes the earliest goods purchased are the first to be sold.

• Closing Inventory: The value of goods remaining at period end, based on the cost of the most recent purchases under FIFO.

Step-by-Step Guidance

1. List all purchases and sales in chronological order, noting the quantity and cost of each batch.

2. Calculate the total units available for sale and the total units sold to determine the number of units in closing inventory.

3. Under FIFO, assign the cost of goods sold to the earliest purchases, so the closing inventory consists of the most recent purchases.

4. Identify which batches (and how many units from each) make up the closing inventory.

5. Calculate the total value of closing inventory by multiplying the number of units from each batch by their respective costs.

Try setting up your FIFO table before revealing the answer!