UNIVERSIDAD NACIONAL DEL ALTIPLANO

FACULTAD DE CIENCIAS CONTABLES Y

ADMINISTRATIVAS

ESCUELA PROFESIONAL DE CIENCIAS CONTABLES

INGLÉS TÉCNICO

INVENTORY

DOCENTE: LIMACHI LOPEZ, Myrian Yovana

PRESENTADO POR:

RODRIGUEZ VILCA, Mónica Grace

COAQUIRA FLORES DEL SOLAR, Aldo Arturo

MAYHUA MARA, Emerson

MAMANI HUMPIRI, Medali Yoelsi

SEMESTRE; VI

GRUPO: B

PUNO – PERÚ

2026
INDICE
Introduction ..................................................................................................................................... 3
1. Theoretical Framework ........................................................................................................... 4
1.1 Definition of Inventory under IAS 2 ................................................................................... 4
1.1 Importance of Inventory in Accounting ............................................................................. 4
2.1 Main Types of Inventory ................................................................................................... 5
3.1 Inventory Systems ............................................................................................................ 6
4.1 Inventory Valuation Methods ........................................................................................... 7
5.1 How Inventory Affects the Balance Sheet and Income Statement ..................................... 9
2. Practical Example .................................................................................................................. 10
2.1. Business Scenario ........................................................................................................... 10
2.2. Solution .......................................................................................................................... 11
2.3. Comparison of Results .................................................................................................... 12
2.4. Explanation of Results..................................................................................................... 13
3. Dinámica ................................................................................................................................ 13
References ...................................................................................................................................... 15
Introduction

Inventory is one of the most essential assets in accounting and business management
because it represents the goods and materials that a company owns for the purpose of
production or sale. In both commercial and manufacturing organizations, inventory plays
a fundamental role in ensuring that business operations run efficiently and that customer
demand can be met without interruption. Since inventory often represents a significant
portion of a company’s current assets, its proper management and accounting treatment
are crucial for maintaining financial stability and operational success.

From an accounting perspective, inventory affects several important financial indicators,

including the cost of goods sold (COGS), gross profit, net income, and the value of current
assets reported on the balance sheet. Therefore, accurate inventory records are necessary
to ensure that financial statements present a true and fair view of a company’s financial
position. Errors in inventory valuation or management can lead to incorrect financial
reporting, poor decision-making, and significant financial losses.

This monograph examines the concept of inventory within the field of accounting,
exploring its definitions, classifications, valuation methods, accounting treatment, and
significance in financial reporting. In addition, practical examples are presented to
illustrate how inventory is recorded and valued in real business situations. Through this
study, readers will gain a comprehensive understanding of the role that inventory plays in
supporting business operations and contributing to organizational profitability and long-
term success.
1. Theoretical Framework

1.1 Definition of Inventory under IAS 2

According to IAS 2 Inventories, inventories are defined as assets that are (IFRS
Foundation, 2025, para. 6):

 Held for sale in the ordinary course of business;

 In the process of production for such sale; or
 In the form of materials or supplies to be consumed in the production process or in
the rendering of services.
The objective of IAS 2 is to prescribe the accounting treatment for inventories (IFRS
Foundation, 2025, para. 1). As the standard explains, "A primary issue in accounting
for inventories is the amount of cost to be recognised as an asset and carried forward
until the related revenues are recognised" (IFRS Foundation, 2025, para. 1). IAS 2
provides guidance on the determination of cost and its subsequent recognition as an
expense, including any write-down to net realisable value (IFRS Foundation, 2025,
para. 1).

Under IAS 2, inventories are measured at the lower of cost and net realisable
value (IFRS Foundation, 2025, para. 9). Net realisable value is defined as "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" (IFRS Foundation,
2025, para. 6).

If the net realisable value of inventory falls below its cost, IAS 2 requires the inventory to
be written down to net realisable value. This requirement ensures that inventory is not
reported at an amount greater than the economic benefits expected to be realised from its
sale. Any write-down is recognised as an expense in the period in which the reduction
occurs.

1.1 Importance of Inventory in Accounting

Inventory is one of the most significant current assets for many businesses, particularly
those in manufacturing, wholesale, and retail trade. Its importance in accounting stems from
several factors (Kieso, Weygandt, & Warfield, 2022):
1. Materiality: For many companies, inventory represents a substantial portion of total
assets. Errors in inventory valuation can materially distort the financial statements.
2. Dual Financial Statement Impact: Inventory affects both the balance sheet (as a current
asset) and the income statement (through cost of goods sold). As Kieso et al. (2022)
explain, the cost of inventory is initially recorded as an asset on the balance sheet and
subsequently expensed as cost of goods sold when the inventory is sold.
3. Matching Principle: Under IAS 2, the determination of income relies on the proper
matching of expenses to revenues (Hendriksen & Van Breda, 1992). 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" (IFRS Foundation, 2025, para. 34).
4. Working Capital Management: Inventory levels directly impact a company's liquidity,
cash flow, and overall working capital position.
5. Tax Implications: The choice of inventory valuation method can significantly affect
taxable income and, consequently, tax liability.

2.1 Main Types of Inventory

Inventory is classified into several categories depending on the nature of the business
(Kieso et al., 2022; Warren, Reeve, & Duchac, 2018):

1.1.1. Raw Materials

Raw materials are basic inputs that are used in the production process. They are the
foundational components that will be transformed into finished goods. Examples
include steel for automobile manufacturing, flour for a bakery, or lumber for furniture
production.

1.1.2. Work in Process (WIP)

Work in process refers to partially completed goods that are still in the production cycle.
These items have incurred some production costs (materials, labour, and overhead) but
are not yet ready for sale. WIP represents the stage between raw materials and finished
goods.

1.1.3. Finished Goods

Finished goods are completed products that are ready for sale to customers. For a
manufacturing company, these are the end products of the production process.

1.1.4. Merchandise Inventory

Merchandise inventory refers to goods that a merchandising company (retailer or

wholesaler) purchases for resale to customers. Unlike a manufacturer, a merchandiser does
not transform the goods; it simply acquires and resells them. Under IAS 2, merchandise
inventory is measured at the lower of cost and net realisable value (IFRS Foundation, 2025,
para. 9).

3.1 Inventory Systems

There are two primary systems for tracking inventory (Warren et al., 2018):

1.1.5. Perpetual Inventory System

Under the perpetual inventory system, the inventory account is updated continuously with
each purchase and sale. The cost of goods sold is recorded at the time of each sale. This
system provides real-time information about inventory levels and is heavily used in
modern enterprise resource planning (ERP) environments.

Characteristics:

 Inventory records are updated for every transaction

 Cost of goods sold is determined at the time of each sale
 Physical counts are still performed periodically to verify accuracy
 Provides better internal control over inventory
1.1.6. Periodic Inventory System

Under the periodic inventory system, the inventory account is updated only at the end
of the accounting period through a physical count. The cost of goods sold is calculated
using the following formula:

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 − 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

= 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

Characteristics:
  No continuous tracking of inventory
 Cost of goods sold is determined only at period-end
 Requires a physical count to determine ending inventory
 Simpler and less costly to maintain, but provides less real-time information

4.1 Inventory Valuation Methods

Under IAS 2, the cost of inventories is assigned using specific cost formulas. Paragraphs
23–27 of IAS 2 provide guidance on the cost formulas used to assign costs to inventories
(IFRS Foundation, 2025, paras. 23–27).

For items that are ordinarily interchangeable, IAS 2 permits the use of either the first-in,
first-out (FIFO) method or the weighted average cost formula (IFRS Foundation, 2025,
para. 25). The specific identification method is required for inventory items that are not
ordinarily interchangeable (IFRS Foundation, 2025, para. 23).

1.1.7. FIFO (First-In, First-Out)

Definition: Under FIFO, the earliest acquired inventory costs are assigned to cost of
goods sold first, while the most recent costs remain in ending inventory. This method
assumes that the physical flow of goods follows the chronological order of acquisition.

Advantages (Kieso et al., 2022):

 FIFO assigns the oldest inventory costs to cost of goods sold while the most recent
costs remain in ending inventory
 Ending inventory reflects recent costs, which is useful in inflationary environments
 Easy to understand and apply
 Results in a balance sheet that more closely reflects current replacement costs
Disadvantages:

 During inflationary periods, FIFO may report higher profits because older, lower
costs are assigned to cost of goods sold
 May result in higher tax liability during inflationary periods
 Does not reflect the current cost of replacing inventory in the income statement
1.1.8. Weighted Average Cost
Definition: The weighted average cost method assigns a single average cost to all units
available for sale during a period. This average is calculated by dividing the total cost of
goods available for sale by the total units available for sale (IFRS Foundation, 2025, para.
27).

Advantages (Kieso et al., 2022):

 Simplifies costing and ensures consistent margins

 Smooths out price fluctuations, reducing earnings volatility
 Helps forecast steady gross profit
 Avoids extreme results that FIFO might produce
Disadvantages:

 Less precise than FIFO or specific identification

 May not reflect the actual physical flow of goods
 Can obscure real price changes
 Under significant volatility, the average may lag behind true replacement costs or
current margins
1.1.9. Specific Identification

Definition: The specific identification method tracks the actual cost of each individual
inventory item and assigns that exact cost to cost of goods sold when the item is sold.
Under IAS 2, this method is required for inventory items that are not ordinarily
interchangeable and for goods or services produced and segregated for specific projects
(IFRS Foundation, 2025, para. 23).

Advantages:

 Provides the most accurate matching of costs to revenues

 Ideal for unique, high-value items (e.g., automobiles, jewellery, real estate)
 Reflects the actual physical flow of goods
Disadvantages:

 Administratively burdensome and costly to maintain

 Impractical for large volumes of interchangeable items
  Potential for income manipulation through selective identification of which specific
items are sold
1.1.10. LIFO (Last-In, First-Out) – Prohibited under IFRS

Under IAS 2, the last-in, first-out (LIFO) method is not permitted (IFRS Foundation, 2025,
para. 25). This is a significant difference between IFRS and US GAAP.

Why LIFO is Prohibited under IFRS:

 LIFO does not reflect the actual physical flow of goods in most cases
 It can result in outdated inventory values on the balance sheet
 It may distort the matching of costs with revenues during inflationary periods
 The IASB concluded that LIFO does not provide a faithful representation of
inventory values
Under US GAAP, LIFO remains an acceptable inventory valuation method. Companies
that adopt IFRS and currently use LIFO under US GAAP must transition to FIFO or
weighted average cost.

5.1 How Inventory Affects the Balance Sheet and Income Statement

Inventory has a dual impact on financial statements (Kieso et al., 2022):

Balance Sheet Impact

 Inventory appears as a current asset under the heading "Current Assets"

 It is typically reported in descending order of liquidity
 The valuation method chosen (FIFO or weighted average) determines the carrying
amount of ending inventory
 Errors in inventory valuation cause mistaken values to be reported for merchandise
inventory
Income Statement Impact

 When inventory is sold, its carrying amount is recognised as an expense (cost of

goods sold) in the period in which the related revenue is recognised (IFRS
Foundation, 2025, para. 34)
 Cost of goods sold is subtracted from net sales to determine gross profit
 The formula is: Net Sales − Cost of Goods Sold = Gross Profit
  Errors in ending inventory create a corresponding error in cost of goods sold
Effects of Inventory Errors on Financial Statements

There is a direct inverse relationship between ending inventory and cost of goods sold
(Kieso et al., 2022):

 Overstated ending inventory → Understated cost of goods sold → Overstated gross

profit and net income
 Understated ending inventory → Overstated cost of goods sold → Understated
gross profit and net income
This inverse relationship means that inventory errors automatically create opposite errors
in cost of goods sold, affecting both the balance sheet and income statement
simultaneously.

2. Practical Example

2.1. Business Scenario

Company: GreenLeaf Office Supplies

Business: GreenLeaf Office Supplies is a merchandising company that purchases and

resells premium office chairs. The company uses a periodic inventory system and prepares
financial statements under IFRS.

Transactions during January 2026:

Date Transaction Units Unit Cost Total Cost

Jan 1 Beginning Inventory 100 $150.00 $15,000

Jan 10 Purchase 200 $160.00 $32,000

Jan 20 Purchase 150 $170.00 $25,500

Jan 25 Sale 300 (sold at $250 each)

Required: Calculate the cost of goods sold (COGS) and ending inventory using:
1. FIFO (First-In, First-Out)
2. Weighted Average Cost

2.2. Solution

Step 1: Summary of Inventory Available

Description Units Unit Cost Total Cost

Beginning Inventory (Jan 1) 100 $150.00 $15,000

Purchase (Jan 10) 200 $160.00 $32,000

Purchase (Jan 20) 150 $170.00 $25,500

Total Available 450 $72,500

Units Sold on Jan 25: 300 units

𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 450 − 300 = 150 𝑢𝑛𝑖𝑡𝑠

Method 1: FIFO (First-In, First-Out)

Under FIFO, the earliest acquired inventory costs are assigned to cost of goods sold first.
The 300 units sold are assumed to come from the earliest acquisitions.

Cost of Goods Sold Calculation:

Layer Units Sold Unit Cost Total Cost

From Beginning Inventory 100 $150.00 $15,000

From Jan 10 Purchase 200 $160.00 $32,000

Total COGS 300 $47,000

Ending Inventory Calculation:

The remaining 150 units are assumed to come from the most recent purchase.
 Layer Units Remaining Unit Cost Total Cost

From Jan 20 Purchase 150 $170.00 $25,500

FIFO Summary:

 Cost of Goods Sold: $47,000

 Ending Inventory: $25,500
 Total: $72,500
Method 2: Weighted Average Cost

Step 1: Calculate Weighted Average Cost per Unit

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 72,500

𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 = =
𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑖𝑡𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 450

𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 =161.11 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 (𝑟𝑜𝑢𝑛𝑑𝑒𝑑)

Step 2: Calculate Cost of Goods Sold

𝐶𝑂𝐺𝑆 = 𝑈𝑛𝑖𝑡𝑠 𝑆𝑜𝑙𝑑 × 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡

𝐶𝑂𝐺𝑆 = 300 × 161.11 =48,333

Step 3: Calculate Ending Inventory

𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝑈𝑛𝑖𝑡𝑠 𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 × 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡

𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 150 × 161.11 =24,167

Weighted Average Summary:

 Cost of Goods Sold: $48,333

 Ending Inventory: $24,167
 Total: $72,500

2.3. Comparison of Results

 Cost of Goods Ending Gross Profit (Sales −
Method
Sold Inventory COGS)

FIFO $47,000 $25,500 75,000−47,000 = $28,000

Weighted
$48,333 $24,167 75,000−48,333 = $26,667
Average

𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 300 𝑢𝑛𝑖𝑡𝑠 × 250 = 75,000

2.4. Explanation of Results

FIFO:

 During a period of rising prices (costs increased from 150 to 170), FIFO assigns
the oldest, lower costs to cost of goods sold.
 This results in lower COGS (47,000) and higher gross profit (28,000).
 Ending inventory reflects the most recent, higher costs ($25,500), providing a more
current valuation on the balance sheet.
Weighted Average:

 This method smooths out the price increases by averaging all costs.
 COGS and gross profit are moderated because the weighted average method
smooths cost fluctuations.
 Ending inventory ($24,167) also reflects a smoothed average cost.
The choice of inventory valuation method directly affects reported profitability and asset
valuation. Under IFRS, both FIFO and Weighted Average are acceptable, but the company
must apply its chosen method consistently (Kieso et al., 2022).

3. Dinámica
 CRUCIGRAMA
10

3
Horizontal

1. All products a company has. 6 9

()
2. Products ready to sell. () 1
3. Things a company sells. ()
4. Products sold to customers. ()
5. An item that is manufactured 2
for sale. ()
7
Vertical
5

6. To give products to
customers for money. ()
7. One product. () 4 8
8. Place where products are
kept. ()
9. Money needed to buy
something. ()
10. To calculate how many products there are. ()

PRODUCT INVENTORY SELL STORE

ITEM STOCK COUNT

GOODS COST SALES

 PREGUNTAS KAHOOT (INVENTORY)

Question 1 ✅ Answer: C. Goods Question 10

available for sale
What is inventory? What is the main purpose of
Question 6 inventory management?
A. Money in a bank
B. Goods available for sale Why is inventory A. To increase employee
C. Employees of a company important? salaries
D. Company debts B. To control and monitor
A. It helps control products stock levels
✅ Answer: B. Goods
available for sale. C. To create taxes
available for sale
B. It increases taxes. D. To reduce customers
Question 2 C. It reduces customer
✅ Answer: B. To control
service.
Where are products usually and monitor stock levels
D. It eliminates suppliers.
stored before being sold?
✅ Answer: A. It helps
A. School control products available
B. Hospital for sale.
C. Warehouse
Question 7
D. Bank
✅ Answer: C. Warehouse What does a physical
inventory count involve?
Question 3
A. Selling products
Who provides products to a
B. Advertising products
company?
C. Counting actual products
A. Customer in stock
B. Manager D. Buying products
C. Accountant ✅ Answer: C. Counting
D. Supplier actual products in stock
✅ Answer: D. Supplier
Question 8
Question 4
Which of the following is
Which term refers to the NOT part of inventory?
process of buying goods?
A. Finished goods
A. Purchase B. Raw materials
B. Sale C. Work in progress
C. Delivery D. Employee uniforms
D. Storage ✅ Answer: D. Employee
✅ Answer: A. Purchase uniforms

Question 5 Question 9

What is stock? What is the English word for

"costo"?
A. A type of tax
B. A company vehicle A. Price
C. Goods available for sale B. Cost
D. Employee salary C. Count
D. Stock
✅ Answer: B. Cost
References

Hendriksen, E. S., & Van Breda, M. F. (1992). Accounting theory (5th ed.). Irwin.

IFRS Foundation. (2025). IAS 2 Inventories. International Accounting Standards

Board. [Link]

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2022). Intermediate accounting (18th ed.).
John Wiley & Sons.

Warren, C. S., Reeve, J. M., & Duchac, J. (2018). Accounting (27th ed.). Cengage Learning.