McKeith and Collins, Financial Accounting & Reporting, 2ndeditionEssay Questions Chapter 51. Explain why inventory valuation has attracted much attention and debate in accounting and comment on the acceptability and applicability of FIFO and LIFO as inventory valuation methods under IAS 2 Inventories.2. Discuss the extent to which management’s choices in accounting for inventory are reduced by IAS 2 Inventories.3. IAS 2 Inventories requires that inventories be measured at the lower of cost and net realisable value. Explain what is meant by cost within the context of IAS 2 and what difficulties arise in practice in determining a cost figure for inventories.4. IAS 11 allows companies to bring in a profit before a construction contract is completed. Explain the accounting treatment required by IAS 11, discuss the rationale behind this accounting treatment and why the requirements of IAS 2 Inventories are not applicable to construction contracts.5. As a newly qualified accountant you are asked to brief a trainee accountant on the practical problems surrounding the audit of the inventory figure of a company. Prepare a report for the trainee outlining the importance of the inventory figure withinthe financial statements and the practical problems which are often faced by accountants during the audit of inventory.6. IAS 2 defines the cost of inventory as comprising all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.Should overheads be included in cost, and if so, to what extent?
1. Explain why inventory valuation has attracted much attention and debate inaccounting and comment on the acceptability and applicability of FIFO and LIFO as inventory valuation methods under IAS 2 Inventories.Basic answerInventory is a unique item in that it features in both the statement of comprehensive income and statement of financial position of a company. In the statement of comprehensive income it forms part of the cost of goods sold calculation; in the statement of financial position it becomes the amount that should be carried forward as inventory to be matched against future revenues. The cost of unsold inventories will have been incurred in the expectation of future revenue and when this will only arise in future periods it must be carried forward to be matched with the revenue when it arises. In certain industry sectors such as retailing and manufacturing, inventory is generallyone of the most significant items in the statement of financial position. The measurement of inventory can have a material impact on profit and financial position.