FACULTY OF MANAGEMENT, COMMERCE AND LAW
DEPARTMENT OF ACCOUNTANCY
MODULE NOTES
IAS 2- Inventory
WARNING: Ignoring this module note may result in severe confusion, excessive head-scratching, and
the classic 'deer in headlights' look during class. This is SELF-STUDY—read it, know it, love it!"
A. GENERAL
1. Purpose of the topic
Inventories normally constitute one of the largest assets of a manufacturing or trading
enterprise.
Inventories represent the portion of past costs that has not yet been used or otherwise
sold and which may therefore be carried forward as an asset that will have future
economic benefits for the enterprise (Everingham & Watson, 1998: 76).
2. Prescribed literature
• IAS 2 – Inventories. (PART A2; A guide through IFRS)
3. Examination possibilities
The examination of IAS 2 can be combined with Financial Management (determination
of contribution/costs/profit for individual products or for a period of time), Taxation
(determination of the tax implications of S 22 of the Income Tax Act) or Auditing (an
evaluation of the valuation and disclosure of inventories as part of a substantive test
programme of the production cycle).
4. Foreknowledge
You should be able to:
• discuss the objectives and scope of IAS 2;
• identify, recognise, measure, present and disclose inventories in accordance with the
stipulations of IAS 2; and
• intergrate inventories with other IFRS Standards.
5. Study outcomes
After studying this document, you should be able to:
• discuss and explain the contents of IAS 2
• explain the stipulations of IAS 2 in terms of the Conceptual Framework for Financial
Reporting; and
• apply the stipulations of IAS 2 to practical case studies.
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B. GENERAL OVERVIEW
1. Definition
Inventories are ASSETS (both tangible and intangible), that:
• Are held for sale in the ordinary course of business; or
• Are in the process of production for such sale; or
• Are consumed during the production of saleable goods or services.
Whether a certain item is classified as inventory depends solely on its purpose to the
entity.
2. Recording of inventory
The acquisition of inventory can be recorded by using one of the following to methods:
• The periodic recording method – a system that records inventory on hand at the
end of each period.
• The perpetual recording method – a system that records inventory in real time.
This means that the inventory on hand is always up to date.
The recording system chosen by the entity may depend on the following factors:
• The size of the business
• The sophistication of the entity’s computerized accounting system
• The importance of having information on inventory levels that is always up to
date.
3. Measurement
Initial measurement:
Inventory is measured at cost, which include:
• Purchasing cost.
• Conversion cost.
• Other costs incurred in bringing inventories to their present location and
condition.
Subsequent measurement:
Inventory is measured at the lower of cost and net realisable value.
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4. Disclosure
UNIVEN LTD
[EXTRACT FROM THE] STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 2025
Note(s) 2025 2024
ASSETS
Current assets
Inventories 2 XXX XXX
Trade and other receivables XXX XXX
Contract asset
Contract costs XXX XXX
Cash and cash equivalents XXX XXX
Non-current assets classified as held for sale
Total current assets XXX XXX
UNIVEN LIMITED
[EXTRACT FROM THE] STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME (BY FUNCTION) FOR THE FINANCIAL YEAR ENDED
31 DECEMBER 2025
ALL MONETARY MOUNTS EXPRESSED IN
THOUSANDS OF RANDS Note(s) 2025 2024
Revenue XXX XXX
Cost of sales (XXX) (XXX)
Gross profit XXX XXX
UL LIMITED
[EXTRACT FROM THE] NOTES TO THE FINANCIAL STATEMETNS FOR THE
FINANCIAL YEAR ENDED 31 DECEMBER 2025
1. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these financial statements have
been consistently applied to all years presented, unless otherwise stated.
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1.1 INVENTORY
Inventories are valued at the lower of cost and net realisable value, where the cost is
calculated using the actual cost/standard cost/retail method. Inventory movements are
recorded using the weighted average formula/first-in-first-out method/Specific identification
method.
1.2 COST OF SALES
When inventories are sold, the carrying amount of those inventories is recognised as an
expense in the period in which the related revenue is recognised. The amount of any write-
down of inventories to net realisable value and all losses of inventories are recognised as an
expense in the period the write-down or loss occurs. The amount of any reversal of any write-
down of inventories, arising from an increase in net realisable value, is recognised as a
reduction in the amount of inventories recognised as an expense in the period in which the
reversal occurs.
The related cost of providing services recognised as revenue in the current period is included
in cost of sales.
2. PROFIT BEFORE TAX
ALL MONETARY AMOUNTS ARE EXPRESSED IN 2025
THOUSANDS OF RANDS
Profit / loss before interest and taxation for the year is arrived at
after taking into account:
Inventory write-downs XXX
Reversal of write-down of inventory XXX
3. INVENTORIES
ALL MONETARY AMOUNTS ARE EXPRESSED IN 2025 2024
THOUSANDS OF RANDS
Finished goods XXX XXX
Work in progress XXX XXX
Raw materials XXX XXX
XXX XXX
The entire finished goods have been pledged as security for a loan (see note X for further
details).
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C. EXAMPLES
EXAMPLE 1: Costs of Purchase
ABC Limited has purchased inventory from an enterprise in the Eastern Cape. The following
costs were incurred in the purchase of the 100 inventory items:
- Purchase price of 100 units is R300 per unit (VAT excl.)
- Transportation costs (from Eastern Cape to Gauteng): R5 000 (VAT excl)
- Insurance costs on transportation: R4 000 (VAT excluded)
- Received 10% trade discount from the supplier
- Paid VAT of R4 000 on the above transactions (ABC Ltd is registered for VAT purposes)
- Received 5% settlement discount from the supplier in respect of payment.
YOU ARE REQUIRED TO:
Calculate total cost of purchase of the 100 inventory items.
SOLUTION: EXAMPLE 1
Purchase price (100 x R300) 30 000
Transportation costs 5 000
Insurance costs 4 000
Trade discount (10% x 30 000) (3 000)
VAT (recoverable from SARS) -
Settlement discount -
36 000
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EXAMPLE 2: Conversion costs
You are provided with the following information of a company for the financial year-ended 31
March:
Normal production capacity per period 200 000 units
Actual production capacity – current period 160 000 units
Production costs incurred during the period: R
Variable costs incurred 800 000
Fixed costs incurred 1 600 000
At period-end there are 10 000 finished products on hand. These products can be sold at a
selling price of R16 each. Sales commission of R2 per unit is payable per unit.
YOU ARE REQUIRED TO:
Calculate at which value the 10 000 finished products will be included on the balance sheet of
the company on 31 March.
SOLUTION – EXAMPLE 2
Costs per unit:
Variable costs per unit (R800 000/160 000 units) 5
Fixed costs (R1 600 000/200 000 units) 8
Costs per unit 13
The costs per unit is R13.
The inventory has to be valued at the lowest of cost or net realisable value. The net
realisable value is R14 per unit.
Value at period end: 10 000 units x R13 R130 000
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EXAMPLE 3: Conversion Costs
You are provided with the following information for the financial period ended 31 March:
Normal production capacity per period 200 000 units
Actual production capacity – current period 300 000 units
Production costs incurred during the period: R
Variable costs incurred 900 000
Fixed costs incurred 1 500 000
At period-end there are 10 000 finished products on hand. These products can be sold at a
selling price of R16 each. Sales commission of R2 per unit is payable per unit.
Assume that the production of 300 000 units was an abnormal high number of units that were
produced.
YOU ARE REQUIRED TO:
Calculate at which value the 10 000 finished products will be included on the statement of
financial position of the company on 31 March.
SOLUTION – EXAMPLE 3
Variable costs per unit (R900 000/300 000 units) 3
Fixed costs (R1 500 000/300 000 units) 5
Costs per unit 8
The costs per unit is R8.
Value at period end: 10 000 units x R8 = R80 000
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EXAMPLE 4: By- products
During the production of product AB, a by-product ABC is also produced.
The total cost to produce one unit of AB is R80.
The selling prices of the product AB and ABC are as follows:
AB 150
ABC 15
At period-end there are 500 units AB on hand and 30 units of ABC on hand.
YOU ARE REQUIRED TO:
Calculate the carrying value of inventory to be disclosed on the statement of financial position
at period-end
SOLUTION – EXAMPLE 4
AB (500 x 80) 40 000
ABC (30 x 15) (450)
Carrying value at period-end 39 550
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EXAMPLE 5: NRV and Disclosure
At period end a company has 200 units on hand at a cost price of R200 each.
The normal selling price of each item is R210. Sales commission of 10% is payable on these
items.
The company has a contract to sell 50 of the items at a fixed price of R300 each.
YOU ARE REQUIRED TO:
Calculate at what value the 200 items will be disclosed on the financial statements of the
company at financial year end.
SOLUTION – EXAMPLE 5
Inventory must be valued at the lowest of cost and NRV.
150 items
Cost: R200 each
NRV: R189 each (R210 x 90%)
50 items
Cost: R200 each
NRV: R270 each (R300 x 90%)
Value
150 items x R189 28 350
50 items x R200 10 000
38 350
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EXAMPLE 6: Disclosure
XYZ limited produces cd’s. Normal production amounts to 100 000 units per period.
The following information is provided to you:
Opening inventory (1 January 2021):
Raw material 50 000
Finished products (20 000 units) 160 000
During the period ended 31 December 2021 the company produced 90 000 units and sold
95 000 units at R14 each.
Costs incurred during the period ended 31 December 2021:
Raw materials purchased 260 000
Abnormal production costs 35 000
Labour costs of production 233 000
Fixed production costs 400 000
Closing inventory (31 December 2021):
Raw materials 30 000
The company uses the First-in-First-out method to value inventory.
YOU ARE REQUIRED TO:
Calculate and disclose all the relevant information in the financial statements of XYZ limited
for the period ended 31 December 2021.
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SOLUTION – EXAMPLE 6
STATEMENT OF FINANCIAL POSITION OF XYZ LIMITED AT 31 DECEMBER 2025
Note R
ASSETS
Current assets
Inventory 9 175 500
STATEMENT OF PROFIT OR LOSS OF XYZ LIMITED FOR THE FINANCIAL YEAR
ENDED 31 DECEMBER 2025
Revenue (95 000 x R14) 1 330 000
Cost of sales (962 500)
Gross profit 367 500
NOTES TO THE FINANCIAL STATEMENTS OF XYZ LIMITED
1. Accounting policy
1.4 Inventory
Inventory is valued at the lowest of cost and net realisable value according to the First-In-
First-Out valuation method.
9. Inventory
Raw material 30 000
Finished products 145 500
175 500
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Calculations (not part of the disclosure!)
Raw material used in the production of 90 000 units:
Opening inventory 50 000
Purchases 260 000
Closing inventory (30 000)
Cost of production 280 000
Production costs of 90 000 units
Raw materials used 280 000
Labour costs 233 000
Fixed production costs (400 000 x 90 000/100 000) 360 000
Cost of producing 90 000 units 873 000
Cost per unit (873 000/90 000) 9,70
Finished products on hand – 31 December 2021 (units)
Opening inventory 20 000
Units produced 90 000
Sold (95 000)
Closing inventory 15 000
Closing inventory of finished products: 15 000 units x R9,70 = R145 500
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Cost of sales for the period
Cost of finished goods sold 887 500
Under-recovery of fixed production costs 40 000
Abnormal production costs 35 000
962 500
Cost of finished goods = (20 000 units x R8) + (75 000 units x R9.70)
= 160 000 + 727 500
= 887 500
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TUTORIAL QUESTION 1_IAS 2 INVENTORY
The implications of VAT can be ignored.
Jen Cliff Pty Ltd (hereafter “Jen Cliff”) was established in South Africa in 1992. They are a
family-owned jewelry design company specialising in bespoke commissioned design and re-
modelling of custom-made earrings. Jen Cliff began as, and remained a humble family
operation whereby their founder’s personal approach to jewelry design results in an out of
world experience for their customers. They believe that craftsmanship begins with
conversation and that a deeply personal relationship with their customers is of utmost
importance.
Jen Cliff has a 31 March financial year end.
The following information relates to its financial year ended on 31 March 2021.
Balances as at 31/03/2020 R
Raw materials 200 000
Work-in-progress 150 000
Finished goods 80 000
Costs incurred during 31 March 2021 financial year
Cost of raw material purchased (before considering discounts 850 000
received)
A 10% trade discount received on raw materials purchased ?
Wages (55% manufacturing, 45% administrative) 2 350 000
Other variable costs (60% production; 40% administrative) 1 800 000
Depreciation (75% on manufacturing plant; 25% administrative 1 000 000
equipment)
Other fixed costs (70% being factory rent; 30% being for the 1 650 000
administrative personals salaries)
Transport costs
• Inwards (i.e. relating to the purchase of raw materials) 450 000
• Outwards (i.e. relating to the sale of finished goods) 150 000
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Storage cost of the raw materials before it is used in the production 230 000
process
Cost of packaging (the earrings is gift wrapped in individual wooden
boxes which is branded with the Jen Cliff logo)
• wooden boxes purchased and used (earrings are gift
wrapped in individual wooden boxes) 280 000
• cardboard boxes used for transporting gift-wrapped earnings
to the customer 140 000
Additional information:
• Jen Cliff has an annual expected production level (normal capacity) of 150 000 earring
sets but only produced 100 000 earrings for the 2021 financial year end.
• 30% of the cost of raw materials is on hand at year end.
• 20% of the cost of work-in-progress is on hand at year end, the rest having been
completed.
• 10% of the cost of finished goods is still on hand at year end, the rest having been sold.
• No wooden or cardboard boxes are kept on hand; these are bought as required.
YOU ARE REQUIRED TO:
Prepare the journal entries, for the financial year ended 31 March 2021, to account for the
transactions based on all the information provided above.
Notes:
• You may assume that each cost/ transaction was a single transaction and that where
applicable, the amount was paid in cash.
• Journal dates are not required
[33]
Communication skills : presentation [2]
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Tutorial Question 2 (12 MARKS)
Paint Galore Limited (hereafter ‘Paint Galore’) is a well established paint production company that
listed on the Johannesburg Stock Exchange in the 1970’s. Paint Galore produces various types of
paints including solvent-borne, water-borne, high solid and enamel paints. Paint Galore has a 30 June
financial year end.
Inventories
The following information has been extracted from the records of Paint Galore for the financial year
ended 30 June 2021:
R
Dr/(Cr)
Sales (9 800 000)
Opening inventory
- Finished goods 1 458 000
447 500
- Work in progress 552 000
- Raw materials
Purchase of raw materials 934 000
Variable production cost
- Labour and overheads 1 230 000
Fixed production overheads ?
Closing inventory
- Finished goods 2 987 500
79 000
- Work in progress 312 000
- Raw materials
Note: Fixed production overheads are allocated at R 37 per unit based on a normal capacity of
186 000 units. The actual production for 2018 was equal to 173 500 units.
Additional information:
• All amounts exclude VAT unless otherwise stated.
• Paint Galore uses the first-in first out method to value its inventory.
• You may assume that the work in progress for the period ended 30 June 2021 has been
correctly calculated at R 9 654 500.
REQUIRED:
Prepare all the extracts of the financial statements relating to the inventories of Paint Galore Limited
for the financial year ended 30 June 2021. (10)
Communication skills: presentation (1)
Adopted: UL
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