COURSE CODE: ACC 221

COURSE TITLE: FINANCIAL ACCOUNTING II

TOPIC COVERED: IAS 2 – INVENTORIES
LECTURER: CORDELIA ONYINYECHI OMODERO (PhD, ACA)
ILLUSTRATIVE QUESTIONS ADAPTED FROM ICAN STUDY PACKS AND
PATHFINDERS

COST MEASUREMENT
Cost of inventories should be measured using either FIFO or weighted – average cost method and
Net Realizable Value.

FIFO
This is first-in-first-out.
CASE STUDY 1
XYZ Ltd is a newly established international trading company. It commenced its operation in
2005. XYZ imports goods from China and sells in the local market. It uses the FIFO method to
value its inventory. Listed next are the purchases and sales made by the entity during the year
2018:

PURCHASES

January 2018 10,000 units @ N25 each

March 2018 15,000 units @ N30 each
September 2018 20,000 units @ N35 each

SALES

May 2018 15,000 units

November 2018 20,000 units

Required
Based on FIFO cost flow assumption, compute the value of inventory at May 31, 2018; September
30, 2018 and December 31, 2018.

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SOLUTION

2018 (a)

Month Details Units Unit Price Amount

N N

JAN Purchases +10,000 25 250,000

MAR Purchases +15,000 30 450,000
Total 25,000 700,000

(b)

MAY Sales -10,000 25 (250,000)

(15,000units) - 5,000 30 (150,000)
-15,000 (400,000)
Balance 10,000 30 300,000

(c)

INVENTORY VALUED ON FIFO BASIS AT MAY 31, 2018

Balance 10,000 30 300,000

September Purchases +20,000 35 700,000
30,000 1,000,000

NOV Sales -10,000 30 (300,000)

(20,000units) -10,000 35 (350,000)
-20,000 (650,000)
Balance 10,000 350,000

INVENTORY VALUED ON FIFO BASIS AT DEC 31, 2018

10,000 35 350,000

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 CASE STUDY 2

WEIGHTED–AVERAGE COST METHOD (AVCO)

FORTUNE LTD, a newly incorporated company, uses the latest version of a software package to
cost and value its inventory. The software use the weighted – average cost method to value
inventory. The following are the purchases and sales made by FORTUNE LTD during 2020 (as a
newly set up company, FORTUNE LTD has no beginning inventory):

PURCHASES
January 100 units @ N250 per unit
March 150 units @ N300 per unit
September 200 units @ N350 per unit

SALES
March 150 units
December 170 units

REQUIRED:
FORTUNE LTD has approached you to compute the value of its inventory and the cost per unit
of the inventory at March 31, 2020; September 30, 2020 and December 31, 2020 under the
weighted – average cost method.

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 SOLUTION
MONTH DETAILS BALANCE RATE AMOUNT WEIGHT VALUATION
(UNITS) /UNIT AVERAGE DATE
COST
/UNIT
N N N
JAN 15 Purchases 100 250 25,000
JAN 31 Balance 100 - -
MAR 10 Purchases 150 300 45,000
MAR 10 Balance 250 280 70,000
MAR 15 Sales (150) 280 (42,000)
MAR 31 Balance 100 - 28,000 280 (w.1) 31/3/2020
SEPT 25 Purchases 200 350 70,000
SEPT 30 Balance 300 - 98,000 327 (w.2) 30/9/2020
DEC 15 Sales (170) 327 (55,533)
DEC 31 Balance 130 - 42,467 327 (w.2) 31/12/2020

WORKINGS
N
(w.1) MAR 10 (100+150) = 250 units (25,000 + 45,000) = 70,000
:. 70,000 = 280 AVC per unit
250

(w.2) SEPT 30 (100+200) = 300 units (28,000 + 70,000) = 98,000

:. 98,000 = 327 AVC per unit

300

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 NET REALIZABLE VALUE (NRV)

Inventories are usually valued at the lower of cost and NRV. This is because, there may be obsolete
or damaged inventories which may have caused a reduction in cost. NRV 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.

CASE STUDY 3
Moonstruck Enterprises Inc. is a retailer of Italian furniture and has five major product lines: sofas,
dining tables, beds, closets and launge chairs. At December 31, 2019, quantity on hand, cost per
unit and Net Realizable Value (NRV) per unit of the product lines are as follows:

Product Line Quantity on Hand Cost Per Unit NRV Per Unit
N N
Sofas 100 1,000 1,020
Dining Tables 200 500 450
Beds 300 1,500 1,600
Closets 400 750 770
Lounge Chairs 500 250 200

Required
Compute the valuation of the inventory of Moonstruck Enterprises at December 31, 2019. Under
IAS 2, using the “lower of cost and NRV principles”.

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SOLUTION
Product Line QTY on hand Cost Per Inventory @ Inventory @ Lower of
Unit Cost NRV Cost
and NRV
N N N N
Sofas 100 1,000 100,000* 102,000 100,000
Dining Tables 200 500 100,000 90,000* 90,000
Beds 300 1,500 450,000* 480,000 450,000
Closets 400 750 300,000* 308,000 300,000
Lounge Chairs 500 250 125,000 100,000* 100,000
1,075,000 1,040,000
*lower of cost and net realizable value

WORKINGS
QTY COST TOTAL NRV TOTAL
COST NRV
(a) (b) (c) (d) (e)
N N N
(a*b) (a*d)
SOFAS 100 1000 100,000 (L) 1020 102,000
DINING 200 500 100,000 200 90,000 (L)
BEDS 300 1500 450,000(L) 1600 480,000
CLOSETS 400 750 300,000(L) 770 308,000
LOUNGE CHAIR 500 250 125,000 200 100,000 (L)
L = LOWER OF COST AND NRV

RECOGNITION OF EXPENSE

When inventory is sold, the carrying amount of inventory should be recognized as an expenses
when the related revenue is recognized. Moreover, the amount of any inventory written down to
net realizable value is recognized as an expenses. The amount of any reversal of write-down of
inventory should be a reduction to the amount written-off in the period it was reversed.