sHORT NOTE CORRECT
📚 LKAS 02 - Inventories
Complete Study Guide with Interactive Mind Map
Scope of LKAS 02
What is Covered:
- Accounting for inventories
- Cost formulas for inventory valuation
- Recognition as expense
What is NOT Covered:
- Work in progress (LKAS 11)
- Financial instruments
- Biological assets (LKAS 41)
Definitions
Inventories:
- Assets held for sale in ordinary course
- Assets in production for sale
- Materials/supplies for production
Net Realizable Value (NRV):
- Estimated selling price
- Less estimated completion costs
- Less estimated selling costs
Measurement of Inventories
Lower of Cost and NRV:
- Cost = Purchase cost + Conversion costs + Other costs
- Compare with Net Realizable Value
- Use lower amount for measurement
Cost Components:
- Purchase price (net of discounts)
- Import duties and taxes
- Transport and handling costs
- Direct labor and overhead
Cost Formulas
FIFO (First-In, First-Out):
- Oldest costs charged to COGS first
- Ending inventory at recent costs
- Better matching in inflationary periods
Weighted Average Cost:
- Average of all costs in period
- Smooths price fluctuations
- Simple to calculate and apply
LIFO is NOT Permitted:
- Last-In, First-Out method prohibited
- Does not reflect actual flow
- Can manipulate profits
Recognition as Expense
When to Recognize:
- When inventories are sold
- Write-down to NRV
- Losses on inventories
Reversal of Write-downs:
- When NRV increases
- Limited to original cost
- Recognize in income statement
Disclosure Requirements
Required Disclosures:
- Accounting policies for inventories
- Carrying amount by classification
- Amount recognized as expense
- Write-downs and reversals
Additional Information:
- Inventories pledged as security
- Cost formulas used
- Circumstances of reversals
📝 Key Study Notes
Remember
Inventories are measured at lower of cost and NRV
Important
LIFO method is not permitted under LKAS 02
Note
Write-downs can be reversed if NRV increases
Focus
Proper disclosure is mandatory in financial statements
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