1. At the reporting date, a business holds an item of inventory that cost CU4,000 to purchase and a further CU300 to bring to its present location and condition (carriage inwards). The item is now expected to be sold for CU4,800, but the business will need to spend CU600 on repackaging and CU250 on marketing/selling costs before the sale can be completed. The inventory clerk values this item at its original cost of CU4,300, arguing 'cost is always the figure we use for inventory, since IAS 2 requires the lower of cost and net realisable value, and cost is the smaller, more prudent figure here anyway.' Assess this valuation.

A) The clerk's valuation is incorrect, but only because carriage inwards of CU300 should be excluded from cost entirely, giving a corrected cost of CU4,000, which is still the lower of cost and NRV
B) The clerk's valuation is incorrect; net realisable value (NRV) must first be calculated as estimated selling price LESS estimated costs to complete and estimated costs necessary to make the sale: CU4,800 - CU600 - CU250 = CU3,950; since NRV (CU3,950) is LOWER than cost (CU4,300), IAS 2 requires the item to be valued at the LOWER of the two, which is CU3,950, not CU4,300 -- the clerk has not actually calculated NRV before assuming cost was the lower (and therefore correct) figure
C) The clerk's valuation is incorrect, but only because inventory should always be valued at estimated selling price (CU4,800) without any deduction for further costs
D) The clerk's valuation of CU4,300 is correct, because IAS 2 always defaults to cost unless net realisable value is clearly and substantially lower

Correct: B difficult IAS 2 Inventories, paras 6-7 and 9 (measurement at the lower of cost and net realisable value)

IAS 2 requires inventories to be measured at the lower of cost and net realisable value (NRV). Cost here is CU4,300 (CU4,000 purchase cost plus CU300 carriage inwards to bring the item to its present location and condition -- correctly included 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: CU4,800 - CU600 (repackaging, a cost of completion) - CU250 (selling costs) = CU3,950. Comparing the two, NRV (CU3,950) is lower than cost (CU4,300), so the item must be written down and valued at CU3,950, not left at cost. The clerk's error was asserting that cost must be the lower, more prudent figure without actually performing the NRV calculation required by the standard.

2. A manufacturing business calculates the cost of a batch of finished goods inventory by including: direct materials CU12,000; direct labour CU8,000; variable production overheads CU3,000; fixed production overheads allocated on the basis of normal production capacity CU4,000; storage costs of finished goods awaiting sale CU1,500; and selling costs (sales commission) CU900. The accountant includes all six items in the cost of the inventory. Assess whether this is consistent with IAS 2.

A) The accountant is incorrect, but only because fixed production overheads can never be included in inventory cost under IAS 2, regardless of the basis of allocation used
B) The accountant is incorrect, but only because direct labour should be excluded from the cost of inventory, since it is treated as a period cost rather than a product cost
C) The accountant is incorrect; direct materials (CU12,000), direct labour (CU8,000), variable production overheads (CU3,000) and fixed production overheads allocated on a normal capacity basis (CU4,000) are all correctly included in the cost of conversion under IAS 2 (total CU27,000), but storage costs of finished goods awaiting sale (CU1,500) and selling costs such as sales commission (CU900) are specifically EXCLUDED from the cost of inventory by IAS 2, and should instead be expensed as incurred rather than added to the inventory valuation
D) The accountant is correct; IAS 2 requires all costs incurred in getting the goods ready for sale and selling them to be included in the cost of inventory, so all six items are properly included

Correct: C complex IAS 2 Inventories, paras 10-16 (costs of purchase, conversion, and costs excluded from inventories)

IAS 2 defines the cost of inventories as comprising costs of purchase, costs of conversion (direct materials, direct labour, and a systematic allocation of fixed and variable production overheads incurred in converting materials into finished goods, with fixed overheads allocated based on normal production capacity), and other costs incurred in bringing the inventories to their present location and condition. IAS 2 explicitly identifies certain costs as EXCLUDED from the cost of inventories and to be recognised as expenses in the period incurred, including storage costs (unless necessary in the production process before a further production stage) and selling costs. Here, the CU27,000 of materials, labour and production overheads is correctly includible, but the CU1,500 storage costs (of finished goods merely awaiting sale, not a necessary part of a further production process) and the CU900 selling costs (sales commission) must be excluded from inventory cost and expensed as incurred.

3. A retailer uses the weighted average cost (AVCO) method under a periodic inventory system. During the month it had: opening inventory 100 units at CU10 each; purchased 200 units at CU12 each on the 10th; purchased 150 units at CU14 each on the 20th; and sold 300 units during the month (perpetual quantities not tracked). The trainee calculates the weighted average cost per unit only from the two purchases (200 units at CU12 and 150 units at CU14), ignoring the 100 units of opening inventory, giving an average cost of CU12.86 per unit ((200x12 + 150x14)/350). Assess this calculation.

A) The trainee's calculation is correct, because opening inventory is always excluded from a periodic weighted average cost calculation, which considers only the period's purchases
B) The trainee's calculation is incorrect, but only because the units sold (300) should replace the units purchased in the denominator, giving an average cost based on units sold rather than units available
C) The trainee's calculation is incorrect, but only because FIFO, not AVCO, must be used whenever opening inventory exists from a prior period
D) The trainee's calculation is incorrect; under the periodic weighted average (AVCO) method, the weighted average cost per unit must be calculated using the TOTAL cost of goods available for sale (opening inventory plus all purchases) divided by the TOTAL units available for sale (opening inventory units plus all purchased units): (100x10 + 200x12 + 150x14) / (100+200+150) = (1,000+2,400+2,100)/450 = CU5,500/450 = CU12.22 per unit, not CU12.86 -- opening inventory must be included in both the numerator and the denominator of the weighted average calculation

Correct: D difficult IAS 2 Inventories - cost formulas (weighted average cost)

Under the periodic weighted average cost (AVCO) method, the weighted average cost per unit is calculated by dividing the total cost of ALL goods available for sale during the period (opening inventory cost plus the cost of all purchases made during the period) by the TOTAL number of units available for sale (opening inventory units plus all units purchased). Excluding opening inventory, as the trainee did, understates the total units available for sale in the denominator relative to a correctly matched numerator/denominator and produces an incorrect average cost. The correct calculation is: total cost (CU1,000 + CU2,400 + CU2,100 = CU5,500) divided by total units (100 + 200 + 150 = 450) = CU12.22 per unit (to two decimal places), which is then used to value both the cost of sales (300 units sold) and the closing inventory (150 units remaining) for the period.

4. A retailer's inventory records for a single product line show the following purchases during the period, with no opening inventory: 100 units at $10 each, then 150 units at $12 each, then 80 units at $13 each. By the end of the period, 210 units have been sold, leaving 120 units in closing inventory. Using the FIFO (first-in, first-out) cost formula permitted under IAS 2, calculate the value of closing inventory.

A) $1,440 (120 units valued at the middle purchase price of $12)
B) $1,560 (120 units valued at the most recent purchase price of $13 applied to all units)
C) $1,200 (120 units valued at the earliest purchase price of $10)
D) $1,510 -- closing inventory of 120 units is assumed, under FIFO, to consist of the MOST RECENTLY purchased units: all 80 units from the last purchase at $13 (= $1,040) plus the remaining 40 units needed from the next most recent purchase (150 units at $12), i.e. 40 x $12 = $480; total = $1,040 + $480 = $1,520 -- so the closing inventory of 120 units is made up of the last 80 units purchased (at $13) plus 40 of the 150 units purchased at $12, giving 80 x $13 + 40 x $12 = $1,040 + $480 = $1,520

Correct: D difficult IAS 2 Inventories - cost formulas, FIFO

Under the FIFO cost formula, the units assumed to be sold first are the earliest units purchased (first-in), which means the units remaining in closing inventory are assumed to be the MOST RECENTLY purchased units (last-in remains in inventory). Total units available = 100 + 150 + 80 = 330; units sold = 210, so closing inventory = 330 - 210 = 120 units. Working from the most recent purchase backwards to build up the 120 units of closing inventory: the last purchase of 80 units at $13 is entirely still in inventory (80 units x $13 = $1,040), and the remaining 120 - 80 = 40 units needed are taken from the next most recent purchase of 150 units at $12 (40 units x $12 = $480). Total closing inventory value = $1,040 + $480 = $1,520. This contrasts with weighted average cost, which would instead spread the total cost across all units evenly rather than attributing specific purchase layers to what remains.

5. A wholesaler is deciding between two inventory record-keeping systems: under a PERPETUAL (continuous) inventory system, the inventory account is updated after every individual purchase and sale transaction throughout the period, so the running balance is known at any point in time; under a PERIODIC inventory system, the inventory account is only updated at the end of the period based on a physical count, with purchases recorded in a separate purchases account during the period and cost of sales derived only at the period end (opening inventory + purchases - closing inventory). Which statement correctly distinguishes the two systems and their implications?

A) Under a perpetual system, cost of sales is calculated and the inventory account updated after each individual transaction, so the inventory balance and cost of sales are known continuously throughout the period; under a periodic system, cost of sales can only be determined at the period end via a physical inventory count, since the periodic system does not track the running balance transaction-by-transaction -- both systems, if applied consistently and accurately, should arrive at the same closing inventory valuation and cost of sales figure for the period, but the perpetual system provides more timely, ongoing information (useful for stock control) while the periodic system is simpler to operate but only reveals inventory losses (e.g. theft or spoilage) as an unexplained shortfall discovered at the count, since no continuous record exists to compare against
B) A periodic system automatically detects and separately records any inventory shrinkage (theft, spoilage, or damage) during the period, whereas a perpetual system cannot
C) A perpetual system cannot be used alongside a physical inventory count, since the two approaches are mutually exclusive and contradictory
D) The two systems always produce different total profit figures for the period, because they use fundamentally different accounting equations

Correct: A difficult Inventory record-keeping systems - perpetual vs periodic

The core distinction is timing and method: a perpetual (continuous) inventory system maintains a running, continuously updated record of inventory quantities and cost of sales as each transaction occurs, so the inventory balance is known at any point without needing to wait for a count. A periodic system, by contrast, does not track inventory movements transaction-by-transaction; instead it relies on a physical count at the period end, with cost of sales derived arithmetically as opening inventory plus purchases minus the counted closing inventory. Both systems, applied correctly, should reconcile to the same result at the period end for a given actual physical count, but the perpetual system's key practical advantage is that any discrepancy between the perpetual (book) record and a physical count directly reveals inventory shrinkage (theft, damage, spoilage) as a specific identifiable variance, whereas under a purely periodic system, any shrinkage is silently absorbed into the cost of sales figure (since periodic cost of sales is a balancing figure derived from the count, with no separate running record to compare it against) and is not separately visible at all.

6. A manufacturer (the consignor) delivers goods to a retailer (the consignee) under a consignment sale arrangement: the retailer displays and attempts to sell the goods on the manufacturer's behalf, but legal title to the goods, and the significant risks and rewards of ownership, remain with the manufacturer until the goods are actually sold to an end customer -- the retailer can return unsold goods to the manufacturer at any time with no obligation to pay for them until a sale is made. At the reporting date, a batch of these goods remains unsold and physically located in the retailer's showroom. In whose closing inventory should these goods be included?

A) Neither party should include the goods in inventory, since consignment goods fall outside the scope of IAS 2 entirely
B) Both the manufacturer and the retailer should include the goods in their respective closing inventories, effectively double-counting them, since both parties have some interest in the goods
C) The manufacturer's (consignor's) closing inventory, because inventory recognition is based on where the significant risks and rewards of ownership -- and effective control -- reside, not on physical location; since the manufacturer retains title and bears the risk of unsold goods (the retailer has no obligation to pay until a sale occurs and can return goods freely), the goods remain the manufacturer's inventory even though they are physically located at the retailer's premises, and the retailer should not recognise them as its own inventory or as a purchase until it actually sells them onward
D) The retailer's (consignee's) closing inventory, because the goods are physically held on the retailer's premises at the reporting date

Correct: C difficult IAS 2 Inventories - recognition principles for consignment inventory

Inventory recognition under IAS 2 (read together with the broader principle of substance over form and control-based recognition) depends on which party bears the significant risks and rewards of ownership and retains effective control over the goods, not merely on physical possession. In a typical consignment arrangement, the consignor (manufacturer) retains legal title and the risk of loss or unsaleability, while the consignee (retailer) merely holds the goods on the consignor's behalf, with no obligation to pay for them unless and until an onward sale to an end customer occurs. Because the manufacturer has not transferred the risks and rewards of ownership, the goods remain part of the MANUFACTURER's inventory at the reporting date, despite being physically located at the retailer's premises; the retailer should not record them as inventory (or as a purchase) until it makes an actual onward sale, at which point the retailer would record the transaction (and the manufacturer would recognise revenue and remove the goods from its own inventory).

7. At the end of Year 1, an entity wrote down a class of inventory from cost of $80,000 to its net realisable value of $60,000, recognising a $20,000 write-down expense, because a temporary market downturn had depressed selling prices below cost. By the end of Year 2, the same inventory (still unsold, and now measured again at the lower of cost and NRV) has a net realisable value that has recovered to $95,000, following a rebound in market prices. How should this recovery be reflected under IAS 2?

A) The reversal is recognised directly in equity/other comprehensive income rather than in profit or loss
B) A new assessment of NRV is made in Year 2, and because NRV ($95,000) now exceeds the original COST ($80,000), the write-down is reversed only up to the original cost -- the inventory is written back up to $80,000 (not to $95,000), reversing the previously recognised $20,000 write-down in full and recognising this reversal as a reduction in cost of sales (or increase in inventory) in Year 2, since IAS 2 does not permit inventory to be carried above its original cost
C) The inventory should be written back up to $95,000 (its new NRV), recognising a total gain of $35,000, since IAS 2 requires inventory to always be measured at the most current net realisable value regardless of original cost
D) No adjustment is made -- once an inventory write-down has been recognised, it can never be reversed under IAS 2, even if net realisable value later recovers

Correct: B difficult IAS 2 Inventories, paragraph 33 - reversal of write-down

IAS 2 requires a new assessment of net realisable value to be made in each subsequent period. When the circumstances that previously caused inventory to be written down below cost no longer exist, or when there is clear evidence of an increase in net realisable value because of changed economic circumstances, the amount of the write-down is reversed (i.e., the new carrying amount is the lower of cost and the revised NRV) so that the new carrying amount is the lower of the cost and the revised net realisable value. Critically, however, inventory can never be written back up above its ORIGINAL COST -- IAS 2 does not permit inventory to be carried at a value exceeding what it originally cost the entity, even if current NRV now exceeds that cost. Here, because the revised NRV ($95,000) exceeds original cost ($80,000), the write-back is capped at cost, meaning the inventory is restated to $80,000 (reversing the full $20,000 previous write-down, but no further gain is recognised for the excess of NRV over cost). This reversal is recognised as a reduction in the amount of inventories recognised as an expense (cost of sales) in the period in which the reversal occurs.

8. A manufacturer holds raw materials that cost $50,000. These raw materials will be incorporated into finished goods that are expected to sell for well above their total production cost (i.e., the finished goods are expected to be profitable). However, the current replacement cost of these specific raw materials, if purchased today, has fallen to $38,000. A trainee argues the raw materials must be written down to $38,000 under the lower of cost and NRV rule. Is this correct?

A) No -- IAS 2 specifically states that raw materials (and other supplies) held for use in the production of inventories are NOT written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost; a decline in the replacement cost of raw materials is not, by itself, evidence of impairment when the resulting finished goods remain expected to be sold profitably. A write-down would only be appropriate if a decline in the price of materials indicates that the cost of the finished products will exceed their net realisable value
B) Yes -- IAS 2 always requires raw materials to be written down to current replacement cost whenever replacement cost falls below original cost, regardless of the profitability of the finished product
C) Raw materials are always measured at current replacement cost under IAS 2, never at historical cost, regardless of expected finished goods profitability
D) The raw materials should be written down only if the finished goods are sold within 12 months of the reporting date, otherwise no write-down is ever required

Correct: A difficult IAS 2 Inventories, paragraph 32 - raw materials held for use in production

IAS 2 contains a specific exception for raw materials and other supplies held for use in the production of inventories: these are NOT written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. This is because the relevant test for finished goods (and hence indirectly for the materials used to make them) is whether the ultimate finished product can be sold at a price covering its total cost, not whether the current replacement cost of an individual input has fallen. A decline in the replacement cost of materials is relevant only as an indicator that the cost of the finished products may exceed their net realisable value -- if the finished goods remain expected to sell profitably despite the cheaper current replacement cost of materials, no write-down of the raw materials is required, and they continue to be measured at their original cost of $50,000. This exception prevents an illogical outcome where profitable production is penalised by a write-down driven purely by short-term input price movements.

9. A company's financial statements disclose, in respect of inventories: the accounting policy for the cost formula used (e.g. FIFO), the total carrying amount of inventories (analysed into appropriate classifications such as raw materials, work in progress and finished goods), the amount of inventories recognised as an expense (cost of sales) during the period, and the amount of any write-down of inventories recognised as an expense during the period. Why does IAS 2 require disclosure of the amount of inventories recognised as an expense SEPARATELY from the amount of any write-down recognised as an expense during the period?

A) IAS 2 does not actually require these two amounts to be disclosed separately -- they may always be combined into a single cost of sales figure with no further breakdown
B) IAS 2 requires the write-down amount to be disclosed only when it exceeds 50% of total cost of sales for the period
C) The separate disclosure exists purely to satisfy tax authorities and has no relevance to users of general purpose financial statements
D) Separating the two amounts allows users of the financial statements to distinguish the normal cost of inventories sold (reflecting ordinary trading activity) from the additional expense arising specifically from inventory write-downs (reflecting a loss in value below cost, often due to obsolescence, damage, or falling selling prices) -- this distinction is useful because write-downs may be unusual, non-recurring, or indicative of a specific problem (such as declining product demand) that would otherwise be obscured if buried within an undifferentiated cost of sales figure

Correct: D difficult IAS 2 Inventories, paragraph 36 - disclosure requirements

IAS 2 requires separate disclosure of the amount of inventories recognised as an expense during the period (essentially, cost of sales arising from the ordinary sale of inventory) and the amount of any write-down of inventories recognised as an expense during the period (arising when inventory is written down to net realisable value below cost). This separation serves users' information needs by distinguishing the normal, recurring cost of trading activity from the effect of inventory impairments, which may be unusual, non-recurring, or symptomatic of a specific issue such as obsolete stock, declining demand, or damaged goods. If the two amounts were simply combined into a single cost of sales figure, users would be unable to assess how much of the period's cost reflects ordinary trading versus how much reflects a loss in the value of inventory below what was originally paid for it -- information that is often relevant to assessing the quality of earnings and the risks facing the business's inventory holdings.

10. At the year end, a business has goods in transit between itself and a supplier, shipped under FOB (free on board) shipping point terms, and separately has goods in transit to a customer, shipped under FOB destination terms. In each case, explain which party should include the goods in transit within its own year-end inventory, and why getting this cutoff wrong could lead to goods being double-counted or omitted entirely.

A) Under FOB SHIPPING POINT terms, risks and rewards (and therefore the right to recognise the goods as inventory) transfer to the BUYER once the goods are shipped by the seller -- so goods in transit under these terms should be included in the BUYER's year-end inventory, even though they have not yet physically arrived, and correspondingly excluded from the seller's inventory. Under FOB DESTINATION terms, by contrast, risks and rewards remain with the SELLER until the goods are actually delivered to the buyer's premises -- so goods in transit under these terms should still be included in the SELLER's year-end inventory, not the buyer's. Applying the wrong cutoff rule for either shipment risks the goods being included in NEITHER party's inventory (understating total reported inventory) or in BOTH parties' inventory (overstating it), since correct inventory cutoff depends on identifying which party bears the risks and rewards of ownership at the reporting date, not simply on which party physically holds the goods
B) Goods in transit are never included in either party's inventory under any shipping terms, since inventory can only be recognised once physically received at the buyer's own premises
C) Goods in transit are always included in the SELLER's inventory regardless of the specific shipping terms agreed between the parties
D) The buyer and the seller are both required to include the same goods in transit within their own year-end inventories simultaneously, since ownership is treated as jointly held while goods are in transit

Correct: A difficult IAS 2 Inventories - year-end cutoff for goods in transit and shipping terms

Correct inventory cutoff at the year end depends on determining, in substance, which party has the risks and rewards of ownership of goods that are physically in transit and have therefore not yet been received by the buyer. Shipping terms conventionally establish this: under FOB (free on board) SHIPPING POINT terms, ownership (and the associated risks and rewards) passes to the buyer at the point the goods are shipped by the seller -- so the buyer should recognise these goods within its own inventory even while they are still physically in transit, and the seller should exclude them from its own inventory (having already recognised the related sale). Under FOB DESTINATION terms, by contrast, ownership does not pass until the goods are actually delivered to the buyer's premises -- so the seller continues to bear the risks of loss or damage in transit and should continue to include the goods within its own inventory until delivery, with the sale (and corresponding inventory reduction) not recognised by the seller until that point. Getting this cutoff wrong in either direction creates a real risk of misstatement: treating FOB shipping point goods as still belonging to the seller (or FOB destination goods as already belonging to the buyer) could result in the goods being OMITTED from both parties' inventory counts entirely, understating total reported inventory across the two entities, while the reverse error could result in the same goods being DOUBLE-COUNTED in both parties' inventory simultaneously.

11. A batch of inventory originally cost $40,000. Due to a change in fashion trends, the items have become slow-moving and are now considered obsolete. Management estimates that the items can still be sold, but only after being reworked at a cost of $6,000, and only for an expected selling price of $28,000 once reworked, with a further $2,000 of selling costs (marketing and delivery) expected to be incurred. Calculate the amount at which this inventory should be measured at the year end, applying the lower of cost and net realisable value rule, and explain how the calculation differs from a simple market price decline.

A) The inventory is written down to zero, since any inventory requiring rework before sale is automatically treated as having no recoverable value under IAS 2
B) The inventory is written down to $28,000, being the expected selling price alone, with no deduction for either the rework cost or the selling costs
C) Net realisable value (NRV) = estimated selling price - estimated costs to complete - estimated selling costs = $28,000 - $6,000 - $2,000 = $20,000; since NRV ($20,000) is lower than cost ($40,000), the inventory is written down to $20,000, with a $20,000 write-down expense recognised. This calculation differs from a simple market price decline (where NRV might simply be a reduced expected selling price less ordinary selling costs) because obsolete or damaged inventory additionally requires estimating and deducting further COSTS TO COMPLETE (here, the $6,000 rework cost) needed to bring the item into a saleable condition in the first place -- a cost that would not typically arise for inventory that is not obsolete or damaged and is already in a saleable state
D) The inventory remains measured at its original cost of $40,000, since IAS 2 does not require any write-down for obsolete inventory unless it is completely unsellable

Correct: C difficult IAS 2 Inventories - NRV calculation for obsolete or damaged inventory requiring completion costs

IAS 2 requires inventory to be measured at the LOWER of cost and net realisable value (NRV), where NRV is the estimated selling price in the ordinary course of business, less estimated costs of completion and less estimated costs necessary to make the sale. For inventory that has become obsolete or damaged, this calculation often requires an additional deduction not present for inventory already in a readily saleable condition: the estimated COST TO COMPLETE the item into a saleable state (here, the $6,000 rework cost), on top of the usual deduction for selling costs (here, $2,000). Calculating NRV as $28,000 (expected selling price once reworked) less $6,000 (rework/completion cost) less $2,000 (selling costs) gives $20,000, which is below the original cost of $40,000, so the inventory must be written down to $20,000, recognising a $20,000 write-down expense (typically included within cost of sales). This illustrates why obsolete or damaged inventory frequently requires a more involved NRV calculation than a straightforward decline in market selling price for an item that remains immediately saleable in its current condition -- the additional cost of completion/rework must be factored in and can significantly reduce the recoverable amount below what the eventual selling price alone might suggest.

12. A retail business sells a wide range of low-value products at different prices and finds it impractical to track the specific cost of each individual item held in inventory at the year end. Instead, it determines its year-end inventory by taking the total SELLING PRICE of goods on hand (based on a physical count at marked retail prices) and deducting an appropriate gross profit margin percentage to arrive at an estimate of cost. What is this technique called, and under what condition does IAS 2 permit its use?

A) The retail method is a method for calculating VAT on retail sales and has no application to inventory valuation whatsoever
B) This technique is known as the RETAIL METHOD (or retail inventory method). IAS 2 permits the use of the retail method (among other cost measurement techniques, such as standard costing) as a practical expedient for measuring the cost of inventory, PROVIDED that the results obtained approximate cost -- it is typically used by retailers with large numbers of rapidly changing, similar items with similar margins, for which it would be impractical to use other cost measurement methods such as FIFO or weighted average on an item-by-item basis. Applying an appropriate, regularly reviewed average gross margin percentage to the total retail selling price of inventory on hand is considered an acceptable approximation of cost in these specific circumstances
C) This technique, called the 'net realisable value shortcut', is never permitted under IAS 2 under any circumstances, regardless of how closely it approximates actual cost
D) The retail method may be used by any business, regardless of the nature of its inventory or operations, as a full substitute for the lower of cost and net realisable value rule

Correct: B difficult IAS 2 Inventories - the retail method as a permitted cost measurement technique

IAS 2 acknowledges that measuring the cost of inventory item-by-item using techniques such as FIFO or weighted average cost may be impractical for certain types of business, particularly retailers holding large volumes of similar, rapidly turning-over items with broadly similar margins (a supermarket or general retailer, for example). For such businesses, IAS 2 permits the use of practical cost measurement techniques, including the RETAIL METHOD, provided the results obtained reasonably approximate actual cost. Under the retail method, the total selling price of inventory on hand (as counted and valued at marked retail prices) is reduced by an appropriate, regularly reviewed average gross profit margin percentage for that category of goods, to arrive at an estimated cost figure -- effectively reversing the normal cost-plus-margin pricing logic used to set the retail price in the first place. This is explicitly recognised as an acceptable practical expedient specifically because it would otherwise be highly impractical for a retailer to track and apply a specific cost formula to every individual low-value item passing through its stores, so long as the resulting estimate remains a reasonable approximation of the inventory's actual cost.

13. A manufacturer's normal production capacity is 50,000 units per month. Fixed production overheads are CU500,000 per month. In a month when actual production is only 30,000 units due to an unusual equipment breakdown, the production manager proposes allocating the full CU500,000 of fixed overhead to the 30,000 units produced, resulting in a fixed overhead cost per unit of CU16.67 instead of the normal CU10.00. Applying IAS 2's requirements on the allocation of fixed production overheads, is this proposal correct?

A) No, but only because fixed production overheads can never be included in the cost of inventory under IAS 2 under any circumstances
B) Yes, fixed production overhead must always be allocated in full to whatever quantity is actually produced in the period, regardless of how that quantity compares to normal capacity
C) Yes, and in addition the unallocated portion should be capitalised as a separate intangible asset representing idle capacity rather than expensed
D) No; IAS 2 requires fixed production overheads to be allocated to costs of conversion based on the normal capacity of the production facilities, and the amount of fixed overhead allocated to each unit is not increased as a consequence of low production or idle plant -- here, only CU10.00 per unit (CU500,000 divided by the normal capacity of 50,000 units) should be allocated to inventory, giving CU300,000 allocated to the 30,000 units produced, with the remaining CU200,000 of unallocated fixed overhead recognised as an expense in the period in which it is incurred

Correct: D difficult IAS 2 Inventories, para 13 (allocation of fixed production overheads based on normal capacity)

IAS 2 requires the allocation of fixed production overheads to the costs of conversion to be based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity from planned maintenance. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant; unallocated overheads are recognised as an expense in the period in which they are incurred. This prevents an abnormally low production period from inflating the reported cost of inventory and deferring what is, in substance, a period cost of under-utilised capacity into future periods.

14. A joint production process starts with a single raw material and, at the split-off point, yields two joint products (Product X and Product Y) and one by-product (Product Z). Joint costs up to split-off total CU900,000. At split-off, Product X has a sales value of CU1,000,000 and Product Y has a sales value of CU500,000 (neither requires further processing before sale). Product Z, the by-product, is sold for CU40,000 with no further processing costs. Applying the approach commonly used under IAS 2 for allocating joint costs and accounting for by-products, how should the CU900,000 of joint costs be allocated?

A) The CU900,000 should be allocated equally between Product X, Product Y and Product Z at CU300,000 each, regardless of their relative sales values, because IAS 2 requires an equal split whenever more than one product emerges from a joint process
B) The entire CU900,000 should be allocated to Product X alone, since it has the highest individual sales value, with nothing allocated to Product Y or Product Z
C) The net realisable value of the by-product (CU40,000) is deducted from the total joint cost, leaving CU860,000 to be allocated between Product X and Product Y using the relative sales value method: Product X receives CU1,000,000 / CU1,500,000 x CU860,000 = CU573,333, and Product Y receives CU500,000 / CU1,500,000 x CU860,000 = CU286,667, while the by-product is measured at its net realisable value of CU40,000, which reduces the cost of the main products rather than being treated as a joint product in its own right
D) Joint costs can never be allocated to by-products or joint products under IAS 2; the entire CU900,000 must instead be expensed immediately as a period cost regardless of which products it relates to

Correct: C difficult IAS 2 Inventories, para 14 (joint products and by-products)

Where a production process results in more than one product being produced simultaneously and the costs of each product are not separately identifiable, IAS 2 requires those costs to be allocated between the products on a rational and consistent basis, commonly the relative sales value of each product at the point at which the products become separately identifiable (split-off). By-products, being immaterial by nature, are often measured at net realisable value, and this amount is deducted from the cost of the main product or products, effectively reducing the joint cost pool before it is allocated between the joint products using their relative sales values. This produces the CU573,333/CU286,667 split described, rather than an arbitrary equal split or allocation to a single product.

15. A manufacturer produces a standard chemical product in large quantities on a continuous, repetitive basis, with each production run taking approximately 14 months from input of raw materials to the product being ready for sale, well in excess of IAS 23's usual benchmark for a substantial period of time. The finance director proposes capitalising the borrowing costs on funds specifically borrowed to finance work-in-progress inventory for this product, on the basis that the production cycle is lengthy enough to make it a 'qualifying asset' under IAS 23. Is the finance director's proposed treatment correct?

A) Yes, any inventory that takes a substantial period of time to bring to a saleable condition automatically qualifies for mandatory borrowing cost capitalisation under IAS 23, regardless of how or in what quantities it is manufactured
B) No; IAS 23 defines a qualifying asset as one that necessarily takes a substantial period of time to get ready for its intended use or sale, but it specifically identifies inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis over a short period of time as an example of an asset that is not a qualifying asset -- IAS 23 also excludes inventories produced in large quantities on a repetitive basis from being qualifying assets even where an individual production cycle is lengthy, because the borrowing is generally used to finance the overall continuous inventory cycle rather than being directly attributable to bringing a specific batch to a saleable condition, so the associated borrowing costs should be expensed as incurred rather than capitalised
C) Yes, and in addition all general (not just specifically borrowed) borrowing costs of the entity must also be capitalised into this inventory regardless of whether they relate to its production
D) No, but only because borrowing costs can never be capitalised into the cost of any inventory under IAS 23 or IAS 2, irrespective of the nature of the production process

Correct: B difficult IAS 23 Borrowing Costs, paras 4-7 (qualifying assets, exclusion for repetitively manufactured inventory)

IAS 23 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of the cost of that asset, where a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. However, IAS 23 explicitly gives inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis as an example of assets that are not qualifying assets, even though a lengthy overall production period might otherwise suggest capitalisation. This reflects the practical difficulty of attributing specific borrowings to a continuous, repetitive production cycle rather than to a discrete, identifiable construction or production project, and means the related borrowing costs are expensed as incurred rather than added to the cost of the inventory.

16. A manufacturer is estimating the net realisable value (NRV) of a batch of finished goods inventory at its year end. The goods have an estimated selling price of CU100 per unit. To get them into a saleable condition, a further CU8 per unit of finishing costs must still be incurred, and the manufacturer will also incur estimated selling costs (sales commission and delivery) of CU6 per unit in order to actually sell them. The original cost of the inventory was CU90 per unit. What is the correct NRV per unit, and at what amount should the inventory be stated?

A) NRV is CU84 per unit (CU100 less CU8 less CU6 less a further arbitrary CU2 margin adjustment), written down accordingly
B) NRV is simply the CU100 estimated selling price, with no deduction for either completion costs or selling costs, so the inventory remains at its CU90 cost since CU100 exceeds cost
C) NRV is CU86 per unit (CU100 estimated selling price, less CU8 estimated costs of completion, less CU6 estimated costs necessary to make the sale) -- because NRV is CU86, which is below the CU90 original cost, the inventory must be written down and stated at its lower NRV of CU86 per unit, since IAS 2 requires NRV to be calculated after deducting BOTH the estimated costs of completion and the estimated costs necessary to make the sale from the estimated selling price, not just one or the other
D) NRV is CU92 per unit (CU100 selling price less CU8 costs to complete only), so the inventory is written down to CU92 per unit, since selling costs are not relevant to determining NRV

Correct: C difficult IAS 2 Inventories, para 6-7 (definition and components of net realisable value)

IAS 2 defines net realisable value 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. Both deductions -- costs still needed to complete the item, and costs needed to actually sell it (such as commission, marketing and delivery) -- must be subtracted from the estimated selling price; a common error is to deduct only the completion costs and overlook the selling costs, which overstates NRV. Here, CU100 less CU8 less CU6 gives an NRV of CU86, which is below the CU90 cost, so inventory is measured at the lower of cost and NRV, CU86 per unit, consistent with IAS 2's core measurement rule.

17. An engineering firm manufactures two categories of product: (1) standard components that are mass-produced, held in bulk, and fully interchangeable with one another, and (2) a small number of bespoke machine parts, each manufactured to a specific customer's unique technical specification and not interchangeable with any other item in inventory. Which cost formula(s) should the firm use to measure the cost of each category of inventory under IAS 2?

A) FIFO or weighted average cost may be used for both categories of inventory, since IAS 2 permits a free choice of cost formula for all types of inventory without exception
B) FIFO must be used for the bespoke machine parts and weighted average must be used for the standard components; no other combination is permitted under IAS 2
C) Specific identification must be used for both categories, since it is always the single most accurate method and IAS 2 requires it whenever the firm is able to individually track costs
D) For the bespoke machine parts, which are not ordinarily interchangeable, IAS 2 requires the specific identification method -- assigning the actual, individually identified cost incurred on each specific item -- rather than FIFO or weighted average; for the mass-produced, interchangeable standard components, the firm may instead use FIFO or a weighted average cost formula, since specific identification is neither required nor practicable for a large volume of interchangeable items

Correct: D difficult IAS 2 Inventories, para 23-25 (cost formulas - specific identification vs FIFO/weighted average)

IAS 2 requires the cost of inventory items that are not ordinarily interchangeable, and goods or services produced and segregated for specific projects, to be assigned using specific identification of their individual costs -- appropriate here for the bespoke, custom-specification machine parts, each of which is unique and traceable to its own actual cost. For inventory items that are ordinarily interchangeable, such as the mass-produced standard components, specific identification of costs would be inappropriate (items are indistinguishable from one another) and impractical at volume, so IAS 2 instead permits the use of the FIFO or weighted average cost formula, consistently applied to items of a similar nature and use.

18. A retailer purchases goods from a supplier for a list price of CU50,000. The supplier grants the retailer a retrospective volume rebate of CU3,000, credited against the retailer's account once a purchase volume target is reached, in addition to a trade discount of CU2,000 already deducted on the original invoice. At the year end, all of the goods to which this rebate relates remain unsold in inventory. How should the CU3,000 volume rebate be reflected in the cost of the retailer's inventory?

A) The CU3,000 volume rebate, like the CU2,000 trade discount, is deducted from the cost of the purchased goods in arriving at the cost of inventory -- trade discounts, rebates and other similar items are deducted in determining the costs of purchase under IAS 2, so the inventory (to the extent unsold) is measured at CU45,000 (CU50,000 less CU2,000 trade discount less CU3,000 volume rebate), not treated as separate income
B) The CU3,000 rebate is recognised as other income in profit or loss and has no effect on the cost of inventory, which remains at CU48,000 (CU50,000 less the CU2,000 trade discount already deducted)
C) The rebate can only be deducted from cost of sales in the period it is received, never from the cost of inventory still on hand, regardless of whether the related goods have been sold
D) The rebate is added to the cost of inventory, since rebates increase the supplier's contractual obligations and therefore increase, rather than decrease, the buyer's recorded cost

Correct: A difficult IAS 2 Inventories, para 11 (costs of purchase - deduction of trade discounts, rebates and similar items)

IAS 2 specifies that the costs of purchase of inventories comprise the purchase price plus import duties and other taxes, and transport, handling and other costs directly attributable to the acquisition, but that trade discounts, rebates and other similar items are deducted in determining the costs of purchase. This applies not only to point-of-sale trade discounts but also to rebates such as retrospective volume-based rebates that relate to the goods purchased -- both reduce the effective cost of acquiring the inventory and should be deducted from it, to the extent the related goods remain on hand, rather than being recognised as separate income unconnected to the inventory's cost.

19. A manufacturer 'sells' inventory to a finance company for CU100,000 cash, but under the terms of the arrangement, the manufacturer has an unconditional obligation to repurchase the same inventory in six months for CU106,000 (reflecting an implicit financing charge), and continues to hold physical possession of the goods and bear all risk of loss or damage throughout the six-month period. How should this arrangement be accounted for in the manufacturer's financial statements?

A) The arrangement has no accounting consequence of any kind for the manufacturer, since cash received under any inventory-related arrangement is always excluded from the financial statements until the repurchase actually occurs
B) The inventory is derecognised in full and a sale of CU100,000 is recognised, with the goods excluded from the manufacturer's inventory for the six-month period, since legal title has technically passed to the finance company
C) The inventory is derecognised and a sale is recognised, but only to the extent of 50% of its value, with the remaining 50% continuing to be recognised regardless of the actual terms of the arrangement
D) Because the manufacturer retains the significant risks and rewards of ownership (it bears the risk of loss or damage and has an unconditional obligation to repurchase the goods at a predetermined, financing-inclusive price), no genuine sale has occurred in substance -- the inventory remains recognised in the manufacturer's own statement of financial position throughout the arrangement, and the CU100,000 cash received is instead recognised as a loan (a financial liability), with the CU6,000 difference between the amount received and the repurchase price recognised as a finance cost over the six-month period, reflecting the transaction's true substance as a secured financing arrangement rather than a genuine sale of inventory

Correct: D difficult Substance over form - sale and repurchase (financing-type) arrangements accounted for as a secured loan rather than a sale

Recognition and derecognition of inventory, like other assets, is based on the transfer of the significant risks and rewards of ownership, not merely on the legal form of an arrangement described as a 'sale'. Where a seller retains an unconditional obligation to repurchase the same goods at a predetermined price (effectively a fixed price incorporating a financing return) and continues to bear the risk of loss or damage throughout, the substance of the arrangement is a secured financing transaction (using the inventory as collateral) rather than a genuine sale, since the risks and rewards of ownership have not truly transferred to the counterparty. Consequently, the inventory remains on the seller's own statement of financial position throughout, the cash received is recognised as a loan liability rather than sale proceeds, and the difference between the cash received and the repurchase price is recognised as a finance cost over the period of the arrangement, reflecting economic substance over legal form.

20. A dairy processing business incurs CU80,000 of joint production costs converting raw milk into its two main products, cream and skimmed milk (both significant, separately saleable joint products), which together have a combined sales value of CU200,000 at the split-off point. The same process also yields a small quantity of whey, a by-product with a minor net realisable value of CU2,000. How are the CU80,000 joint costs allocated between cream, skimmed milk and the whey by-product?

A) The minor CU2,000 net realisable value of the whey by-product is deducted from the CU80,000 total joint costs (reducing the amount to be allocated between the main products to CU78,000), with the remaining CU78,000 then allocated between cream and skimmed milk using the relative sales value method (or another appropriate basis) -- because the whey is a by-product of only minor value, rather than a second significant joint product, it is not allocated a share of the joint costs using the same relative sales value approach applied to cream and skimmed milk; instead, its minor value is simply used to reduce the cost pool attributed to the main products
B) The whey by-product is allocated the full CU80,000 of joint costs, with cream and skimmed milk allocated no cost at all, since by-products are always allocated the majority of any joint cost pool
C) The CU80,000 is allocated between all three items (cream, skimmed milk and whey) using the relative sales value method, treating the whey exactly the same as the two significant joint products
D) By-products with a minor net realisable value are never recognised as inventory at all under any method, and their value is permanently excluded from the accounting records entirely

Correct: A difficult Joint cost allocation - by-products of minor value deducted from joint costs, distinguished from significant joint products allocated via relative sales value

Where a joint process yields both significant joint products (such as cream and skimmed milk here, both separately significant and saleable) and a by-product of only minor value (such as the whey), a different approach is normally applied to the by-product than to the main joint products. Rather than allocating a share of the joint costs to the by-product using the relative sales value method (as is used to apportion costs between the significant joint products), the minor net realisable value of the by-product is typically deducted from the total joint costs, reducing the cost pool to be allocated between the main products -- reflecting that the by-product's value is not significant enough to warrant the same formal cost allocation exercise applied to genuinely significant joint products.

21. An entity purchases raw materials from an overseas supplier, invoiced in a foreign currency, for FC50,000 (foreign currency units), when the spot exchange rate on the date of the purchase transaction is FC2 = CU1 (so the purchase cost is CU25,000). By the entity's year end, several months later, the exchange rate has moved to FC1.8 = CU1, and the raw materials remain unsold in inventory. Should the inventory be retranslated at the year-end exchange rate?

A) The inventory is derecognised entirely and removed from the financial statements once any exchange rate movement of any size occurs after the original purchase date
B) No; inventory is a non-monetary asset, so, once translated into the entity's functional currency at the spot exchange rate ruling on the date of the original purchase transaction (here, CU25,000, using the FC2 = CU1 rate), it is NOT subsequently retranslated for exchange rate movements at the year end or at any other later date -- this contrasts with monetary items (such as a foreign currency-denominated payable or receivable still outstanding at the year end), which ARE retranslated at the closing rate, with any exchange differences recognised in profit or loss
C) Yes, the inventory must be retranslated at the year-end rate of FC1.8 = CU1, giving a restated cost of approximately CU27,778, with the CU2,778 difference recognised as an exchange gain, since all foreign currency-denominated balances are retranslated at each reporting date
D) The inventory is retranslated only if the exchange rate has moved by more than 10% since the original transaction date, applying a specific materiality threshold that determines whether retranslation of non-monetary items is required

Correct: B difficult Foreign currency translation - non-monetary items (inventory) translated at the transaction-date rate, not retranslated, contrasted with monetary items

In accounting for foreign currency transactions, a fundamental distinction is drawn between monetary items (such as cash, receivables and payables, representing a right or obligation to receive or pay a fixed or determinable amount of currency) and non-monetary items (such as inventory and property, plant and equipment). Monetary items denominated in a foreign currency are retranslated at the closing (reporting date) exchange rate at each reporting date, with resulting exchange differences recognised in profit or loss. Non-monetary items measured at historical cost, such as inventory (before consideration of any subsequent NRV write-down, which is a separate consideration unrelated to exchange rate movements), are translated at the exchange rate ruling on the date of the original transaction and are NOT subsequently retranslated for later exchange rate movements, since they are not monetary balances awaiting future settlement in a fixed amount of currency.

22. Rajshahi Precision Parts Ltd uses a standard costing system to value its finished goods inventory. During the year, the actual production run for its main product line incurred material and labour variances against standard: a favourable price variance of CU120,000 (due to a one-off bulk purchase discount unlikely to recur), and an unfavourable efficiency variance of CU340,000 caused by abnormal machine breakdowns that led to excessive material wastage and idle labour time, well beyond the normal, unavoidable spoilage the standards already build in. The finance manager proposes to include both variances in full within the cost of the closing inventory, on the basis that 'standard cost is our approved costing method, so whatever the standards produce is by definition the cost of inventory.' Applying IAS 2, is this treatment correct?

A) Yes, standard costs are always an acceptable practical expedient for approximating actual cost under IAS 2 provided they are regularly reviewed, and no adjustment for variances is ever required regardless of their cause, since the standard costing system itself is deemed to represent cost
B) No -- IAS 2 permits standard costs as a practical expedient for convenience only where the results approximate actual cost, taking materials, labour, efficiency and capacity utilisation into account and regularly reviewed and revised; however, this does not permit abnormal costs to be capitalised into inventory: the CU340,000 unfavourable efficiency variance caused by abnormal machine breakdowns represents wasted resources not attributable to normal production and must be expensed as incurred (recognised in profit or loss, not included in the cost of inventory), whereas the favourable price variance, if it reflects a cost genuinely incurred to acquire this period's inventory (rather than a windfall unconnected to the goods on hand), may appropriately reduce the standard cost of the inventory actually produced, subject to it not distorting cost below what was genuinely paid
C) Both variances should be excluded entirely from inventory and from profit or loss, deferred instead as a separate intangible asset representing 'production efficiency costs' to be amortised over future periods as the machinery is repaired
D) No, because IAS 2 prohibits the use of standard costing entirely as a valuation technique, requiring all inventory to be valued at actual historical cost with no approximation methods of any kind permitted under any circumstances

Correct: B complex IAS 2 Inventories (paragraphs 16, 21-22 -- standard cost technique and abnormal costs excluded from cost)

IAS 2 paragraph 21-22 permits techniques such as standard cost or the retail method to be used for measuring the cost of inventories for convenience, provided the results approximate cost -- standard costs take into account normal levels of materials, labour, efficiency and capacity utilisation, and must be regularly reviewed and revised in light of current conditions. Critically, IAS 2 paragraph 16 requires abnormal amounts of wasted materials, labour, or other production costs to be recognised as expenses in the period incurred, rather than being included in the cost of inventory -- this applies regardless of whether an entity uses actual or standard costing. Here, the unfavourable efficiency variance stems from abnormal machine breakdowns (an unusual, non-recurring event outside normal production), not from the ordinary, expected level of spoilage or inefficiency the standards are built to absorb, so it must be expensed rather than capitalised into inventory cost. The favourable price variance is a different matter: if it reflects a genuine, non-abnormal cost actually incurred to acquire the inventory on hand, it can appropriately adjust the standard cost down to better approximate actual cost (the purpose IAS 2 permits standard costing for in the first place), though care must be taken it does not push the reported cost below what was truly paid. Option A wrongly treats standard cost as automatically compliant regardless of what drives the variances; option D is incorrect as IAS 2 explicitly permits standard costing as a practical expedient; option C invents a fictitious intangible asset treatment with no basis in any IFRS.

23. Sherpur Agro Processing Ltd grows and harvests palm fruit. Under IAS 41 Agricultural Activity, the standing palm fruit on the trees is measured at fair value less costs to sell up to the point of harvest, with gains and losses recognised in profit or loss as the fruit grows (biological transformation). Once harvested, the fruit is transferred to the processing plant to be pressed into crude palm oil for sale. The financial controller is unsure which standard governs the harvested fruit once it leaves the tree, and proposes to continue remeasuring it at fair value less costs to sell indefinitely, all the way through processing and into the finished crude palm oil inventory. Is this correct?

A) No -- IAS 41 governs the biological asset (the palm trees) and the agricultural produce only up to the point of harvest; at the point of harvest, the harvested produce is measured at its fair value less costs to sell as at that date, and this fair value then becomes its deemed cost for the purposes of applying IAS 2 Inventories going forward, so from harvest onward (including through the pressing process into crude palm oil) the produce is accounted for under IAS 2 at the lower of that deemed cost (plus subsequent processing costs) and net realisable value, not continuously remeasured to fair value
B) No, because harvesting itself is prohibited from being recognised as a distinct accounting event under IAS 41; the palm trees must continue to be measured at fair value less costs to sell as biological assets even after the fruit has been physically removed and is undergoing processing
C) No, because harvested agricultural produce falls entirely outside the scope of both IAS 41 and IAS 2, and must instead be recognised as a financial instrument at fair value through profit or loss under IFRS 9 for the entire period it is held
D) Yes, IAS 41's fair value less costs to sell measurement basis continues to apply to the agricultural produce all the way through processing into crude palm oil and beyond, since the product originated from a biological asset and this origin permanently determines its measurement basis regardless of subsequent processing

Correct: A difficult IAS 41 Agricultural Activity (paragraphs 13, 20 -- point of harvest and deemed cost), IAS 2 Inventories (subsequent measurement of harvested produce)

IAS 41 draws a clear boundary at the point of harvest: biological assets (the living palm trees, and the growing, unharvested fruit while still attached and undergoing biological transformation) are measured at fair value less costs to sell, with changes recognised in profit or loss, reflecting the standard's rationale that biological growth itself creates value that should be recognised as it occurs. However, once agricultural produce is harvested, it ceases to be a biological asset and IAS 41 requires it to be measured, at the point of harvest, at its fair value less costs to sell at that date -- and this amount becomes the produce's deemed cost of inventory for subsequent application of IAS 2. From that point forward, the harvested and (in this case) subsequently processed produce is accounted for as ordinary inventory under IAS 2: carried at the lower of cost (the deemed cost from harvest, plus any further costs incurred in pressing/processing) and net realisable value, not continuously remeasured to fair value. The financial controller's proposal to keep remeasuring indefinitely through and beyond processing is incorrect and conflates the two standards' distinct scopes. Option D wrongly extends IAS 41 measurement beyond its scope boundary at harvest; option C is incorrect as harvested agricultural produce is squarely within IAS 2's scope, not IFRS 9; option B incorrectly denies that harvest is a recognised transition point, contrary to IAS 41's explicit treatment.

24. Habiganj Relief Foundation, a not-for-profit entity, maintains an inventory of blankets, food packets, and medical supplies that it distributes to disaster-affected communities free of charge or at a heavily subsidised nominal price, rather than selling them at a normal commercial margin. At the year end, the foundation's accountant proposes to measure this inventory at the lower of cost and net realisable value, consistent with the standard IAS 2 rule applied to ordinary commercial inventory, arguing that 'IAS 2 makes no exception for the nature of the holder.' Is the accountant's proposed measurement basis correct?

A) No, because inventory distributed free of charge must always be expensed in full at the point of acquisition and can never be recognised as an asset on the statement of financial position under any circumstances, regardless of whether it remains on hand at the year end
B) Yes, IAS 2's lower of cost and net realisable value rule applies uniformly to all inventory held by any entity, including not-for-profit entities distributing goods free of charge, with no modification of any kind, since IAS 2 does not distinguish holders by their commercial or charitable purpose
C) No -- the amendment to IAS 2 addressing inventories held for distribution at no charge or for a nominal charge requires such inventory to be measured at the lower of cost and current replacement cost, not the lower of cost and net realisable value; this is because net realisable value (estimated selling price less costs to complete and sell) is a meaningless or misleading measure for goods that are never intended to be sold at a market price, so current replacement cost (what it would cost to replace the inventory today) is used instead as a more relevant proxy for measuring any impairment
D) No, because not-for-profit entities are entirely exempt from IAS 2 and from any inventory valuation requirement whatsoever, and may carry such inventory at any arbitrary value management chooses to assign

Correct: C difficult IAS 2 Inventories (amendment on inventories held for distribution at no charge or nominal charge, applicable to not-for-profit and similar entities)

IAS 2 was amended to specifically address inventories held by not-for-profit and similar entities for distribution at no charge or for a nominal charge (for example, a relief organisation's stock of blankets and food packets). For such inventories, the standard requires measurement at the lower of cost and current replacement cost, rather than the standard lower of cost and net realisable value rule applied to commercial inventory. The rationale is that net realisable value depends on an estimated selling price in the ordinary course of business, which is not a meaningful concept for goods the entity never intends to sell at a market-determined price; current replacement cost (the cost the entity would currently incur to replace the inventory) provides a more relevant basis for identifying whether the inventory's value has been impaired, while still being held as an asset (recognised as an asset until distributed, at which point it is expensed) up to that point. The accountant's assumption that IAS 2 makes no distinction for the nature of the holder is therefore incorrect -- this specific amendment exists precisely because the standard does distinguish this scenario. Option B ignores this explicit amendment; option D wrongly claims a blanket exemption from IAS 2 that does not exist; option A incorrectly denies that such inventory can be recognised as an asset at all prior to distribution, which is not what the amendment requires.

25. Chapainawabganj Steel Ltd holds 8,000 tonnes of a specialised steel alloy in inventory at the year end. Of this, 5,000 tonnes are already committed under a firm, non-cancellable sales contract with a customer at a fixed price of CU42,000 per tonne (well above the alloy's general current market selling price of CU37,000 per tonne, which has fallen recently). The remaining 3,000 tonnes are uncommitted and will be sold at the prevailing general market price. Estimated costs to complete and sell are CU2,500 per tonne for both categories. How should net realisable value be assessed for each portion of this inventory, and why does the assessment differ between the two?

A) Net realisable value is irrelevant for any portion of inventory covered by a firm sales contract, since such inventory is automatically excluded from IAS 2's scope entirely and instead measured exclusively under IFRS 15 revenue recognition principles
B) IAS 2 requires net realisable value for inventories held to satisfy firm sales contracts to be based on the contract price for the quantities covered by those contracts, not the general market selling price; here, the 5,000 tonnes committed under the firm contract are assessed using the CU42,000 contract price (giving NRV of CU39,500 per tonne after deducting CU2,500 costs to complete and sell, comfortably above cost, so no write-down applies to that portion), while the remaining uncommitted 3,000 tonnes are assessed using the general market selling price of CU37,000 (giving NRV of CU34,500 per tonne), since no firm contract price is available to reference for that portion -- this distinction exists because NRV is meant to reflect the actual net amount the entity expects to realise from each specific portion of inventory, which genuinely differs between contractually committed and uncommitted quantities
C) Net realisable value for the entire 8,000 tonnes must be assessed using the same CU37,000 general market selling price, since IAS 2 requires a single, uniform selling price assumption to be applied consistently across all units of inventory of the same type, regardless of whether specific units are already committed under a firm sales contract
D) The 5,000 contracted tonnes must be written down to the CU37,000 general market price despite the firm contract, because IAS 2 always requires the lower of the contract price and the general market price to be used for any inventory quantity, regardless of whether the entity has a legally binding, non-cancellable right to sell at the higher contracted price

Correct: B difficult IAS 2 Inventories (paragraph 31, net realisable value for inventories held under firm sales contracts)

IAS 2 paragraph 31 specifically addresses this scenario: the estimated net realisable value of inventories to be sold under firm sales (or service) contracts is based on the price specified in those contracts, since the entity has a legally binding entitlement to that price for the contracted quantity, making it the genuinely relevant, realistic estimate of what will actually be realised from those specific units -- while inventory in excess of the quantities committed under firm sales contracts is assessed using general market selling prices, since no such contractual entitlement exists for the uncommitted portion. This distinction matters because it can produce materially different NRV outcomes for physically identical inventory items, depending purely on whether a specific quantity happens to be covered by a binding contract: here, the 5,000 contracted tonnes are assessed at CU42,000 - CU2,500 = CU39,500 NRV per tonne, while the uncommitted 3,000 tonnes are assessed at CU37,000 - CU2,500 = CU34,500 NRV per tonne, and each portion is then separately compared to its cost to determine whether any write-down is needed for that specific tranche. This reflects the underlying principle that NRV is intended to capture the amount an entity genuinely expects to realise, which can legitimately differ across different, distinguishable portions of otherwise identical inventory based on their specific contractual status. Option C wrongly forces a single uniform selling price assumption across contractually distinct portions; option A incorrectly claims contracted inventory falls outside IAS 2's scope entirely, which it does not (only the associated revenue recognition, once the sale actually occurs, falls under IFRS 15 -- the inventory itself remains within IAS 2 until then); option D wrongly and unnecessarily imposes the lower of the two prices even where a binding, enforceable contract guarantees the higher price for the specific committed quantity.