This document is a compilation of the lecture notes and textbook notes relevant for second year business accounting at the University of Pretoria.
The document aims to better explain the topic by making use of examples as well as highlighting the key principles underlined in the accounting standar...
These notes were compiled using the following sources:
o Lecture Notes
o Textbook notes: Gripping GAAP 2020 Edition
Scope Exclusions from the textbook:
5.2.6 Finance Costs
5.3.7 Joint and By-Products
Learning Outcomes:
o Discuss and apply the relevant definitions in IAS 2
o Calculate the cost of inventories (including purchasing costs, conversion costs and other
costs)
o Calculate the cost of inventories by applying cost allocation techniques and cost formulas
(self-study for BAC 200 – assumed prior knowledge)
o Calculate and account for the net realisable value (NRV) of inventories
o Disclose inventories in the financial statements of a company
Introduction
Relevant standard: IAS 2 – Inventories
Focus:
1) Determining the cost of inventories
2) When to recognise the cost of the inventories as an inventory expense
Definition:
Inventory is
- An asset (can be tangible or intangible)
- That is
Held for sale in the ordinary course of business; or (Also known as merchandise)
In the process of production for such sale; or (Materials and supplies)
In the form of materials or supplies to be consumed in the production process or in the
rendering of services (Consumables)
Note: IAS 2 does not prescribe “when to recognise inventories”, instead the conceptual framework
will prescribe when to recognise an asset, and seeing as inventories are classified as assets we look
to the conceptual framework for “when to recognise inventories”
Compiled by: Rutendo Samakande
, Business Accounting (Second Year) Topic Notes
Additional Notes:
1. Inventories are classified as current assets
2. It is very important to note the intention of the entity with respects to the asset in
question. Does the entity intend to sell this asset or do they intend to hold it in the ordinary
course of business (IAS 2 – Inventories) for capital appreciation (IAS 40 – Investment
Property)
3. Classes of inventory according to the type of business
Retailer Manufacturer
E.g A company that purchases shoes from a E.g A company that manufactures the shoes
supplier and sells them to customers in their own factory in order to sell to the
customers
Merchandise Raw Materials
Work in Progress
Finished Goods
Consumable stores – consumed in the production process or used to provide a service
4. If an item meets the asset definition as well as the recognition criteria as per the Conceptual
Framework, then we recognise an asset. We then decide what type of asset we are
classifying (Investment Property, Inventories, Property Plant and Equipment etc) by looking
to see if, the item that we just recognised as an asset, meets the inventories definition as per
IAS 2.
5. Take note of what the entity’s “ordinary course of business” is. Essentially what does this
business do? Are they a company that sells shoes, or are they a company that buys and sells
property? Then if your item fits into that ordinary course of business you have an inventory
asset
Recording Inventory Movement
Recording Inventory Movement (Self Study)
Periodic System Perpetual System
Acquisitions of inventory recorded in the Acquisition of inventory is recorded in the
“Purchases Account” “Inventory Account”
This means that the correct inventory balance This means that the correct inventory balance
is recorded at a point in time is reflected in real time (continually)
We update the ledger account for the cost of We are perpetually updating our ledger
each ‘inventory purchase transaction’ but not account to reflect the cost of each ‘inventory
for the cost of each ‘inventory sale transaction’. purchase transaction’ and the cost of each
Instead, we record the total cost of all ‘inventory sale transaction’
‘inventory sale transactions’ for a period as a
single transaction
Cannot identify lost stock Easier to detect theft using this system
Uses physical stock count to determine the Relies on the ‘real-time’ processing for the
inventory closing balance closing balance of inventories. Uses the stock
take to perhaps verify this amount and detect
any theft etc.
Compiled by: Rutendo Samakande
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