Short Note

📚 Welcome to LKAS 02 Study Guide!

🔔 Subscribe to our YouTube channel for more accounting tutorials and study materials!

🔴 Subscribe Now!

LKAS 02 - INVENTORIES

Comprehensive Study Guide with Mind Map

1. OBJECTIVE & SCOPE

Objective: To prescribe the accounting treatment for inventories under historical cost system.

Scope Includes:

• Raw materials and supplies
• Work in progress
• Finished goods
• Goods purchased for resale

Scope Excludes:

• Financial instruments
• Biological assets
• Work in progress under construction contracts

2. MEASUREMENT OF INVENTORIES

Inventories = LOWER of Cost OR Net Realizable Value

Cost Components:

• Purchase Price: Invoice price less trade discounts and rebates
• Import Duties: Non-recoverable taxes and duties
• Transport Costs: Handling and other costs to bring inventory to present location
• Conversion Costs: Direct labor + Production overheads

Exclusions from Cost: Storage costs, administrative overheads, selling costs, abnormal waste

3. COST FORMULAS

Permitted Methods:

• Specific Identification: For items not ordinarily interchangeable
• FIFO (First-In, First-Out): Assumes items purchased first are sold first
• Weighted Average: Cost calculated on weighted average basis

Prohibited: LIFO (Last-In, First-Out) method is NOT permitted under LKAS 02

4. NET REALIZABLE VALUE (NRV)

NRV = Estimated Selling Price - Estimated Costs of Completion - Estimated Selling Costs

When to Apply NRV:

• Inventories are damaged or obsolete
• Selling prices have declined
• Estimated costs of completion have increased
• Estimated selling costs have increased

Write-down: When cost > NRV, inventory must be written down to NRV

5. RECOGNITION AS EXPENSE

Inventories are recognized as expense when:

• Inventories are sold
• Written down to NRV
• Lost or consumed in production

Reversal: If NRV increases later, the write-down can be reversed (but not above original cost)

6. DISCLOSURE REQUIREMENTS

• Accounting policies for measuring inventories
• Total carrying amount by classification
• Carrying amount at fair value less costs to sell
• Amount recognized as expense during the period
• Amount of write-downs and reversals
• Circumstances leading to reversal of write-downs
• Carrying amount pledged as security

LKAS 02 - MIND MAP

KEY POINTS TO REMEMBER

• Inventories measured at LOWER of Cost or NRV
• LIFO is prohibited under LKAS 02
• Cost includes purchase price + conversion costs + other costs
• NRV = Selling price - completion costs - selling costs
• Write-downs can be reversed if circumstances change
• Comprehensive disclosure requirements must be met