IAS 2 INVENTORIES

                                                IAS 2 INVENTORIES

Objective of IAS 2

The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising 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.

Scope

Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [IAS 2.6]

However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]

• work in process arising under construction contracts (see IAS 11 Construction Contracts
• financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement)
• biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).

Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by: [IAS 2.3]

• producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change.
• commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.

Fundamental Principle of IAS 2

Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9]

Measurement of Inventories

Cost should include all: [IAS 2.10]

• costs of purchase (including taxes, transport, and handling) net of trade discounts received
• costs of conversion (including fixed and variable manufacturing overheads) and
• other costs incurred in bringing the inventories to their present location and condition

IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of inventories that meet the definition of a qualifying asset. [IAS 2.17 and IAS 23.4]

Inventory cost should not include: [IAS 2.16 and 2.18]

• abnormal waste
• storage costs
• administrative overheads unrelated to production
• selling costs
• foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
• interest cost when inventories are purchased with deferred settlement terms.

The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22]

For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. [IAS 2.23]

For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed.

The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. For groups of inventories that have different characteristics, different cost formulas may be justified. [IAS 2.25]

Write-Down to Net Realisable Value

NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. [IAS 2.6] Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs. [IAS 2.34]

Expense Recognition

IAS 18 Revenue, addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognised, the carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognised as an expense when they occur. [IAS 2.34]

Disclosure

Required disclosures: [IAS 2.36]

• accounting policy for inventories
• carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the entity
• carrying amount of any inventories carried at fair value less costs to sell
• amount of any write-down of inventories recognised as an expense in the period
• amount of any reversal of a writedown to NRV and the circumstances that led to such reversal
• carrying amount of inventories pledged as security for liabilities
• cost of inventories recognised as expense (cost of goods sold). IAS 2 acknowledges that some enterprises classify income statement expenses by nature (materials, labour, and so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period). [IAS 2.39] This is consistent with IAS 1Presentation of Financial Statements, which allows presentation of expenses by function or nature.

IAS 16 PROPERTY PLANT AND EQUIPMENT

                                        IAS 16 PROPERTY PLANT AND EQUIPMENT

Objective of IAS 16

The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.

Scope

IAS 16 does not apply to

• assets classified as held for sale in accordance with IFRS 5
• exploration and evaluation assets (IFRS 6)
• biological assets related to agricultural activity (see IAS 41) or
• mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources

The standard does apply to property, plant, and equipment used to develop or maintain the last two categories of assets. [IAS 16.3]

Recognition

Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]

• it is probable that the future economic benefits associated with the asset will flow to the entity, and
• the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. [IAS 16.43]

IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. [IAS 16.14]

Initial Measurement

An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site (see IAS 37, Provisions, Contingent Liabilities and Contingent Assets). [IAS 16.16-17]

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognised or imputed. [IAS 16.23]

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS 16.24]

Measurement Subsequent to Initial Recognition

IAS 16 permits two accounting models:

• Cost Model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]
• Revaluation Model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31]

The Revaluation Model

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]

If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36]

Revalued assets are depreciated in the same way as under the cost model (see below).

If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised as income. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through the income statement (that is, no "recycling" through profit or loss). [IAS 16.41]

Depreciation (Cost and Revaluation Models)

For all depreciable assets:

The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50].

The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51]

The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60];

The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61]

Depreciation should be charged to the income statement, unless it is included in the carrying amount of another asset [IAS 16.48].

Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [IAS 16.55]

Recoverability of the Carrying Amount

IAS 36 requires impairment testing and, if necessary, recognition for property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. [IAS 16.65]

Derecogniton (Retirements and Disposals)

An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognised in the income statement. [IAS 16.67-71]

If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business. [IAS 16.68A]

Disclosure

For each class of property, plant, and equipment, disclose: [IAS 16.73]

• basis for measuring carrying amount
• depreciation method(s) used
• useful lives or depreciation rates
• gross carrying amount and accumulated depreciation and impairment losses
• reconciliation of the carrying amount at the beginning and the end of the period, showing:
  • additions
  • disposals
  • acquisitions through business combinations
  • revaluation increases or decreases
  • impairment losses
  • reversals of impairment losses
  • depreciation
  • net foreign exchange differences on translation
  • other movements

Also disclose: [IAS 16.74]

• restrictions on title
• expenditures to construct property, plant, and equipment during the period
• contractual commitments to acquire property, plant, and equipment
• compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77]

• the effective date of the revaluation
• whether an independent valuer was involved
• the methods and significant assumptions used in estimating fair values
• the extent to which fair values were determined directly by reference to observable prices in an active market or recent market transactions on arm's length terms or were estimated using other valuation techniques
• for each revalued class of property, the carrying amount that would have been recognised had the assets been carried under the cost model
• the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders

Adjusting Entries

Solution of Adjusting Entries - Case 4.1 - Financial and Managerial Accounting

a) No adjusting entry is needed because the revenue has already been earned prior to dec 31st.

b) Adjusting Entry:
                              unearned revenue a/c.........Dr
                                             revenue  a/c    ............Cr    
Explanation:
                    3 months revenue was collected in advance on Dec 1 and was credited to unearned revenue a/c.At Dec 31st an adjusting entry is needed to recognized 1/3 of this amount is revenue.This entry effects is to reduce liability increase the revenue earned in this period and thus increase in owners equity.

c)Adjusting Entry:
                               A/R                          ...................Dr
                                     Revenue earned      ..........................Cr

Explanation:
                   It is necessary to record the revenue which is earned.

d) No adjusting Entry is needed because the affect of this will be start from next accounting period

e)Adjusting Entry:
                            deprecition exp...............Dr
                                        Accumulated deprection.........Cr

Explanation: Entry will be pass because the value of fixed asset is decreased with the passage of time.

f) Adjusting Entry:
                               
                                salary exp..............Dr
                                        salaries payable............Cr

Explanation: Entry will be passed because the expense of December is always recor in the same accounting period.

Cash flow statement

                        Definition of 'Cash Flow Statement'

A financial statement that reflects the inflow of revenue vs. the outflow of expenses resulting from operating, investing and financing activities during a specific time period


                                    "Specimen of Cash flow statement"

"There are 2 methods of cash flow statement"

1/ Direct Method

2/Indirect Method

Direct Method:(also called the income statement method) reports cash receipts and cash disbursements from operating activities. The difference between these two amounts in the net cash flow from operating activates. In other words, the direct method deducts from operating cash receipts the operating cash disbursements. The direct method results in the presentation of a condensed cash receipts and cash disbursements statement.

As directed from the accrual based income statement, Tax consultants Inc. reported revenues of $125,000. However, because the company's accounts receivable increased during 2003 by $36,000, only $89,000 ($125,000 − $36,000) in cash collected on these revenues. Similarly, company reported operating expenses of $85,000, but accounts payable increased during the period by $5,000. Assuming that payable related to operating expenses, cash operating expenses were $80,000 ($85,000 − $5,000). Because no taxes payable exist at the end of the year, the$6,000 income tax expense for 2003 must have been paid in cash during the year. Then the computation of net cash flow from operating activities is as follows:

Cash collected from revenues Cash payment for expensesIncome before income taxes Cash payments for income taxes Net cash provided by operating activities

$89,000 $80,000 --------- $  9,000 $  6,000 --------- $  3,000 ======

"Net cash provided by operating activities" is equivalent of cash-basis net income. ("Net cash used by operating activities" would be equivalent to cash-basis net loss)

2/ Indirect Method:(or reconciliation method) starts with net income and converts it to net cash flow from operating activities. In other words, the Indirect method adjusts net income for items that affected reported net income but didn't affected cash. To compute net cash flows from operating activities, noncash changes in the income statement are added back to net income, and net cash credits are deducted. Explanations for the two adjustments to net income in this example―namely, the accounts receivable and accounts payable―are as follows.

Increase in Accounts Receivable―Indirect Method:When accounts receivable increase during the year, revenues on an accrual basis are higher than on a cash basis because goods sold on account are reported as revenues. In other words, operations for the period led to increased revenues, but not all of these revenues resulted in an increase in cash. Some of the increase in revenues resulted in an increase in accounts receivable. To convert net income to net cash flow from operating activities, the increase of $36,000 in accounts payable must be deducted from net income.

Increase in Accounts Payable―Indirect Method:When accounts payable increase during the period, expenses on an accrual basis are higher than they are on a cash basis because expenses are incurred for which payment has not taken place. To convert net income to net cash flow from operating activities, the increase of $5,000 in accounts payable must be added back to net income.

As a result of the accounts receivable and accounts payable adjustments, net cash provided by operating activities is determined to be $3,000 for the year 2003. This calculation is shown as follows.

Net income Adjustments to reconcile net income to net cash provided by operating activities: Increase in accounts receivable Increase in accounts payableNet cash provided by operating activities

$(36,000) $   5,000

$34,000 ($31,000) ---------- $  3,000 =======

Note that net cash provided by operating activities is the same whether the direct or indirect method is used.

Bank Reconciliation Statement

                                    BANK RECONCILIATION STATEMENT


A form that allows individuals to compare their personal bank account records to the bank's records of the individual's account balance in order to uncover any possible discrepancies.






Bank reconciliation statement helps businesses to reduce the amount of unutilized cash in suspense accounts. By adding deposits in transit, deducting outstanding business checks and adding or deducting bank errors, Bookkeeping Services India work closely with you to adjust the bank reconciliation statement in your bank statement and also preparefinancial statement.

The following was obtained from the records of ABC Computers of 30 September 2009

Bank reconciliation statement on 31 August 2009 (Previous month)

		£	£
Balance as per bank statement			12200
Outstanding deposit:			2100
Total			14300
Outstanding cheques:	No: 100	2200
	No: 106	740
	No: 109	540	(3480)
Total			10820 (Opening balance for cash book)

			Cash Book for September 2009
Date	Details	Amount (£)	Cheque	Date	Details	Amount (£)
3	Sales and VAT	3700	110	3	Water and Electricity
4	A Jones	2400			and VAT	400
10	Deposit	3100	111	4	S Payne	21100
15	Sales and VAT	850	112	9	J Kooste	350
30	Deposit	1670	113	10	Purchases and VAT	2700
			114	12	Salaries	4200
			115		Donation	500
			116	20	Purchases and VAT	3150
			118		J Goosen	600
	Pencil Total	11720			Pencil Total	33000

Bank Statement for September 2009

		Debit	Credit	Balance
Date		£	£	£
1	Balance			12200	Cr
4	Cheque 111	21100		8900	Dr
	Deposit		3700	5200	Dr
	Deposit		2100	3100	Dr
5	Deposit		2400	700	Dr
	SF	60		760	Dr
	DO	1400		2160	Dr
10	Cheque 113	2070		4230	Dr
	Cheque 110	400		4630	Dr
	Deposit		3100	1530	Dr
	Cheque 112	530		2060	Dr
	Cheque 614	2180		4240	Dr
	CB	20		4260	Dr
	Cheque 109	540		4800	Dr
	SF	100		4900	Dr
12	Cheque 115	500		5400	Dr
15	Deposit		850	4550	Dr
20	Cheque 118	600		5150	Dr
	Deposit		4050	1100	Dr

Additional information:

1. Cheque 100 was drawn on the 10 March 2008 to pay a payable. (This cheque is therefore regarded as "stale" for this example - some countries may have different requirements for stale cheques)
2. ABC Computers signed a debit order for the monthly instalment on their motor vehicle bought from Speedy Car Sales.
3. Cheque 614 was not drawn by ABC Computers. (Therefore must be taken out of the bank reconciliation)
4. According to the paid cheques, cheque 112 was drawn for £350 and cheque 113 was drawn for £2070.
5. A receivable deposited the amount of £4050 owed by him directly into ABC Computers bank account.

Required:

1. Complete the cash book for September 2009 by starting with the pencil totals.
2. Prepare the bank reconciliation statement as at 30 September 2009.

[edit]Solution

Compare all amounts in the cash book for September 20.9 with the amounts that are present on the bank statement to see if they are the same. All correct amounts should be crossed off on both statements as they do not contain errors. Any erroneous amounts should be marked so that they can be addressed.

Erroneous amounts may include:

1. Reversed numbers i.e. 164 to 614
2. Outstanding cheques
3. Payments received that have not yet been reflected
4. Errors on cheques
5. Date discrepancies (though amounts and figures may be correct)

Prepare the following two statements for any bank reconciliation:

Cash book (Bank account) of ABC Computers	Dr		Cr
Balance b/f	10820
Pencil total	11720	Pencil total	33000
Payable (Cheque 100)	2200	Speedy Car Sales	1400
Purchases and VAT (Cheque 113)	630	Bank Charges and VAT (60+20+100)	180
Receivable	4050
Balance c/f	5160
	34580		34580
		Balance b/f	5160

Bank reconciliation statement

Bank reconciliation	Debit	Credit
Balance as per bank statement	1100
Erronerous cheque (614)		2180
Error on cheque 112 (£530-£350)		180
Outstanding deposit		1670
Outstanding cheques:
Cheque 114	4200
Cheque 116	3150
Cheque 106	740
Credit balance as per cash book		5160
	9190	9190