Essential Components Involved in Measuring Inventories in Compliance with IAS 2:

1. Cost of Inventories:
   The cost of inventories includes all costs incurred to bring the inventory to its present location and condition. This includes:
   • Purchase Price: The cost of purchase, including import duties, non-recoverable taxes, and transport costs.
   • Directly Attributable Costs: Costs that are necessary to bring the inventories to their current location and condition, such as handling and storage costs.
   • Trade Discounts and Rebates: These are deducted from the cost of inventories.
2. Net Realisable Value (NRV):
   Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. If the NRV is lower than the cost of inventories, the inventories are written down to their NRV to comply with the prudence principle.
3. Cost Formulas:
   IAS 2 allows for different cost formulas to allocate costs to inventories:
   • First-In, First-Out (FIFO): Assumes that the earliest purchased goods are sold first.
   • Weighted Average Cost: Averages the cost of inventories over a period and applies it to ending inventories.
4. Exclusion of Certain Costs:
   Abnormal costs such as wastage, storage costs (unless necessary for production), and administrative overheads not directly related to bringing the inventories to their present location are excluded from the cost of inventories.
5. Lower of Cost and NRV:
   Inventories should be measured at the lower of cost and NRV. This ensures that inventories are not overstated on the balance sheet, in compliance with the prudence principle.