Inventory costing 2 better understand

Inventory costing

Inventory costing – is about costs allocated to value inventory in stock at the end of a reporting period and calculate the costs of sales/gross profit earned in a period. Most operations comprise retail or wholesale operations, using relatively simple inventory costing systems such as FIFO, LIFO or Average Costs, other operations such as manufacturing or servicing/construction use standard or actual costing systems.

Also keep in mind that the general rule in IFRS is that inventory is measured as the lesser of cost or net realizable value.

For context Net realizable value

There are a number of different inventory costing methods available for Inventory / Cost of Goods Sold (COGS) valuations/allocations. Perpetual systems continuously update the inventory, avoiding issues inherent with periodic based systems. For cost flow, there are three (3) regularly used cost methodologies in the world: FIFO, LIFO, and Weighted-Average Cost (also commonly referred to as Average Cost).

  1. FIFO or First-In, First-Out, always assigns the cost of the earliest unit available at the time of sale to COGS, regardless of which unit from the inventory pool is used.
  2. LIFO or Last-In, First-Out, always assigns the cost of the newest unit available at the time of sale to COGS, regardless of which unit from the inventory pool is used.
  3. Average Cost calculates the cost that is assigned to COGS and inventory each period closing with new units purchased and added to the inventory.

However, there are also more complex inventory costing systems that facilitate the (financial and operational) management of manufacturing and servicing activities, reference is made to standard costs and actual costs.

To visualize the difference of these three systems (FIFO, LIFO and Average Costs) here is a simple case in quantities of one product in inventory only:

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IFRS 13 Asset accumulation method

IFRS 13 Asset accumulation method – The asset accumulation method and the adjusted net asset method are both generally accepted business valuation methods of the asset-based business valuation approach.

The asset accumulation method is well suited for business and security valuations performed for transaction, taxation, and controversy purposes. All business valuation approaches and methods can indicate the defined value of the subject business entity. IFRS 13 Asset accumulation method

In addition, the asset accumulation method also helps to explain the concluded value—by specifically identifying the value impact of each category of the subject entity assets and liabilities.

IFRS 13 Asset accumulation methodThis informational content of the asset accumulation method is particularly useful in a transaction, taxation, or controversy context when the particular analysis … Read more

Adjusted net asset method

Adjusted net asset methodThe adjusted net asset method is used to value a business based on the difference between the fair market value of the business assets and its liabilities. Depending on the particular purpose or circumstances underlying the valuation, this method sometimes uses the replacement or liquidation value of the company assets less the liabilities.

Under this method, the analyst adjusts the book value of the assets to fair market value (generally measured as replacement value or liquidation value) and then reduces the total adjusted value of assets by the fair market value of all recorded and unrecorded liabilities. Both tangible and identifiable intangible assets are valued in determining total adjusted net assets.

If the analyst will be relying on other professional Read more

Accounting policies

Accounting policies: The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

Loss allowance

Loss allowance is an approach for the prudence or conservatism principle. Assets should not be overstated, liabilities not understated. Better save than sorry!

Inventories the highlights

Inventories the highlights as it says provides a high level summary of the accounting and financial reporting in respect of inventory.

See Inventories for IFRS for Small and Medium-sized entities, the complete IAS 2 Inventories standards is also available.

Inventory is also called stock in trade, or just stock. Inventories the highlights

ScopeInventory warehouse valuation LIFO

Applies to all inventories except:

  • work in progress on construction and service contracts (IAS 11);
  • financial instruments (IAS 32 and IFRS 9); and
  • biological assets arising from agricultural activity (IAS 41).

Does not apply to the measurement of inventories held by:

  • producers of agricultural and forest products, and minerals and mineral products, that are measured at net realisable value in accordance with well-established practices in those industries;
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Liabilities and assets for current tax

Liabilities and assets for current tax - Current tax for the current and prior periods should be recognised as a liability to the extent that it is not paid