About

IAS 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:

  • specific identification of cost for items of inventory that are not ordinarily interchangeable; and
  • the first-in, first-out or weighted average cost formula for items that are ordinarily interchangeable (generally large quantities of individually insignificant items).

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.

What you should know

  • Know and apply the definitions.
  • Calculate historical cost.
  • What is included in the cost of inventory
  • Account for inventory transactions using both the periodic and the perpetual methods
  • Apply the various cost formulas to measure the cost of inventories.
  • Explain why cost flow assumptions are required and apply both FIFO and weighted average cost formulas
  • Identify the amounts to be recognised as inventory expenses
  • Calculate the net realisable value of inventories.
  • Explain the net realisable value basis of measurement and account for adjustments to net realisable value
  • Present and disclose inventories in the annual financial statements.