FA – May 2025 – L1 – Q5 – IAS 2 Inventories Valuation & Write-down

Apply IAS 2 to inventory valuation, compute NRV, and account for write-down.

Question

a. IAS 2 provides guidance on how to determine the costs of inventories, the subsequent recognition of the costs and the formulae that are used to assign costs to inventories.

Required:
i. Explain the term inventories, giving examples, in accordance with IAS 2. (5 Marks)
ii. State the elements of costs that should be included in the measurement of inventories. (3 Marks)

b. The following information relates to the three different products P, Q and R of Oba Limited as at the year ended September 30, 2023.

Product P was made according to the specification of a customer at a cost of ₦128,400 but the customer went bankrupt. The product was delivered to an agent for sale at a delivery cost of ₦13,320. The agent is expected to sell it for ₦180,000 and will receive 5% commission on the selling price.
The cost of Product Q is ₦79,200. The product has been damaged but it can be repaired at a cost of ₦12,600 after which it is expected to be sold for ₦82,500.
Product R cost ₦112,500. The product normally sells for ₦144,400 but it has been badly damaged due to flood. A customer has agreed to buy the product for ₦58,600.

Required:
i. Calculate the amount at which the inventories should be included in the statement of financial position as at September 30, 2023. (8 Marks)
ii. Determine the total amount written down on the inventories. (2 Marks)
iii. Explain how the total amount written down on the inventories will be accounted for in the financial statements. (2 Marks)

Answer

a. Inventories

i. Definition (IAS 2): Inventories are assets:

Held for sale in the ordinary course of business;
In the process of production for sale; or
In the form of materials or supplies to be consumed in production or service delivery.

Examples: Finished goods acquired for resale, finished goods produced, work-in-progress, and raw materials/supplies.

ii. Costs to include:

Cost of purchase (including taxes, transport, handling, net of trade discounts).
Cost of conversion (fixed and variable overheads).
Other costs of bringing inventories to their present location and condition.

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b. Valuation of Inventories (at lower of cost and NRV)

Product P

Cost = ₦128,400
Selling price = ₦180,000
Delivery cost = (13,320)
Commission (5% × 180,000) = (9,000)
NRV = 157,680
Valuation = lower of cost (128,400) and NRV (157,680) → ₦128,400

Product Q

Cost = ₦79,200
Selling price = ₦82,500
Repair cost = (12,600)
NRV = 69,900
Valuation = lower of cost (79,200) and NRV (69,900) → ₦69,900

Product R

Cost = ₦112,500
NRV = ₦58,600
Valuation = ₦58,600

Total Inventory Valuation = ₦256,900

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Write-down of Inventory

Product	Cost ₦	NRV ₦	Write-down ₦
P	128,400	157,680	Nil
Q	79,200	69,900	9,300
R	112,500	58,600	53,900
Total	–	–	63,200

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Accounting treatment:
IAS 2 requires that any write-down to NRV should be recognised as an expense in the period incurred.

Journal entry:

Debit Cost of Sales ₦63,200,000
Credit Inventory ₦63,200,000

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Tags: Financial Statements, IAS 2, Inventories, NRV, Valuation, Write-down
Level: Level 1

Topic: Write-down of Inventory
Series: MAY 2025

Uploader: Samuel Duah