1. initial recognition
    • How to establish the cost of inventory initially?
  2. subsequent measurement
    • Basic idea: The lower of cost and net realizable value (prudence concept)
    • Cost: FIFO; Weighted average method
    • Net realizable value
  3. where does it fit into the financial statements?
    • Statement of financial position-closing inventory
    • Statement of profit or loss and other comprehensive income-cost of sales
    • Accruals concept (matching principle)-closing inventory adjustment
  4. Disclosures

1 Initial measurement

Inventory= quality X value

            (Number of inventory purchased X historical cost)*


*Historical cost:

  1. Cost of purchase: purchase price, import duties but excluding discounts
  2. Cost of conversion relating to production(direct/variable overheads)
  3. Eg, labour costs in factory; (but labor costs relating to marketing department is not) machinery depreciation

  4. Other costs happened necessary to bring the inventory to its intended location and condition

Eg, Carriage inwards can be cost. But carriage outwards is expense


2 Subsequent Measurement (valuing closing inventory)

Inventory= quality X value

           (Closing inventory X    (using FIFO, WAC))


Lower of cost and net realizable value

 Aim: not to overstate the asset(inventory) figure, ie, be prudent.


For statement of financial position, closing inventory will appear under current assets and if there’s more closing inventory then it will make statement of financial position look better.

For statement of profit or loss and other comprehensive income, if there’s more closing inventory, then there’ll be less cost of sales then overstate the profit.

1 What is “and”?

Inventory number Cost NRV Lower of cost or NRV
*1 5 3 3
*2 5 2 2
*3 3 5 3
*4 2 3 2
15 13 10


No netting off.

-inventory 3,4 have risen in value and it will be net off by inventory1,2 if we choose NRV=13.

-so we should choose 10.


2, Cost


What comes in first then goes out first;

Used for perish goods such as meat


Weighted Average Cost: used when inventory movement is unknown and price is not consistent. Think about petrol




LIFO(banned): what comes in last then goes out first. Think about technology companies. In USA, this is allowed.


3 Net realizable value (NRV)   (Example 3 Jonny ltd)

=estimated selling price-estimated cost to sell


3 Where does inventory fit into?


Statement of financial position as at 31 DEC 2014 for Manny company:

Current assets $
Inventory 8,990


Statement of profit or loss and other comprehensive income (extract) for the year ended 31 DEC 2014 for Manny company:

  $ $
Sales revenue $78,559
Cost of sales
Opening inventory 8,009
Purchase 5,889
-closing inventory (8,990)
Gross profit 73,651



4 disclosures


1, Accounting policy for inventories:


     -Weighted average method?


2, Carrying amount of any inventories at fair value less costs to sell (NRV).


3, Total carrying amount of inventories and each type of inventories:


Raw materials        1,000

Work in progress     2,000

Finished goods        1,000

Total                4,000