Inventory Assets

Most of us are familiar with the word inventory as this is commonly used everywhere, we see them everywhere, and we purchase them daily. Before we will tackle the examples of inventory assets, let us know first the scope of an inventory according to the standards.

What Is an Inventory?

As per International Accounting Standards (IAS) 2, inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials).You may also see sample inventory.

1. Certain inventories are excluded from the scope which are as follows:

Work in process arising under construction contracts as there is a separate standard to account for these inventories which is under IAS 11 or the discussion on Construction Contract. You may also see property inventory.
Financial instruments as these will be discussed under the standards of IAS 39 or Financial Instruments: Recognition and Measurement.You may also see inventory lists.
Biological assets related to agricultural activity and agricultural produce at the point of harvest as these assets will be recognized and recorded as per the standards of IAS 41 or the discussion about Agriculture.You may also see accounting inventory.

Furthermore, although the following are within the scope of the standard mentioned above about inventories, IAS 2 or discussion on inventories does not apply to the measurement of inventories held by producers of agricultural and forest products, agricultural produce after its harvest, and minerals and mineral products, when they are measured at net realizable value (NRV), above or below cost, in accordance with well-established practices in those industries. If they are measured at NRV, the changes in value of the inventory are recognized in the profit or loss (P/L) in the period of the change. Meanwhile, when they are measured at fair value less costs to sell, the changes in fair value less costs to sell should be recognized in P/L in the period of the change.You may also see store inventory.

The fundamental principle IAS 2, which governs the standards on inventories, is that it is a requirement for the inventory to be measured at the lower of cost and net realizable value (LCNRV).You may also see simple inventory examples.

Examples of Inventory Assets

The types of inventory differ according to the type of business one is operating. You must first determine the type of business that you are operating. The types of businesses may be the following: manufacturing, retailing, and service entities.

1. Manufacturing Businesses

For manufacturing entities, you purchase an inventory and convert it into something your company is producing to be sold to your customers which may be consumers and other businesses.You may also see application inventory

Examples of inventory in a manufacturing entity are as follows:

1. raw materials – such as wood, screws, bolts, and springs

2. work-in-process inventory – such as an unfinished production of cake, car, and appliances

3. finished goods inventory – such as a finished furniture, accessories, guitar, and bags

2. Retailers and Distributors

For retailers and distributors, they do not usually have raw materials inventory and unfinished goods inventory since they are just purchasing finished goods from their supplier. Commonly, the inventory that they have is the finished goods inventory.You may also see job inventory examples.

Examples of goods in finished goods inventory of a retailer or distributor are the following:

toys sold to their customers
cans of soft drink
junk food

3. Service businesses

Lastly, for service entities, just like any other businesses, they also have an inventory. This consists of any supplies that they have used up in providing their services.You may also see classroom inventory examples.

Examples of these supplies are as follows:

For a mural artist, his or her paint brushes and paint
For gardeners, their herbicides used to remove weeds
For hairdressers, their dyes, dryers, and scissors applied and used on your hair
For acupuncturists, their needles used to provide an acupuncture

Measurement of Inventories

In measuring the inventories, the costs to be included are as follows:

cost of purchase
taxes
cost of transport
cost of handling
other costs incurred in bringing the inventories to their present location and condition

Note that the costs must be net of trade discounts received and costs of conversion such as fixed and variable manufacturing overheads.You may also see estate inventory examples.

There are also certain instances when borrowing costs may be included as part of the cost of the inventory such as when it meets the definition of a qualifying asset.

The cost of the inventory should not include the following:

selling costs
abnormal waste storage costs
administrative overheads not related to production
foreign exchange differences
interest cost when inventories are purchased with deferred settlement terms

The methods used for the measurement of cost may be the standard cost or the retail method provided that the results of the computation would approximate the actual cost of the inventory.You may also see inventory examples in excel

Disclosures

According to the standards, in recording your inventory, there are certain things that needs to be disclosed in your financial statement which are as follows:

accounting policy for inventories
carrying amount
carrying amount of any inventories which is carried at fair value less costs to sell
amount of any write-down of inventories recognized as an expense
amount of any reversal of a write-down
the circumstances that led to such reversal
carrying amount of inventories pledged as security for liabilities
cost of inventories recognized as expense or in the cost of goods sold

Quick Recap

The standard governing the recognition and recording of inventories is the IAS 2 “Inventories.” IAS 2 presents the scope in which an item can be classified as an inventory, the measurement of inventory, the required disclosures, and many others.You may also see equipment inventory examples

The types of inventory differ according to the type of entity one is operating which can be manufacturing, retailer or distributors, and service entities. For manufacturing entities, the inventories to be recognized are raw materials, work in process, and finished goods inventory. For retailers or distributors, the inventory they are going to record is only the finished goods inventory since they do not produce or manufacture goods. Lastly, for the service entities, they record inventories by accounting for the supplies that they have used when they provide services. Examples of inventory assets for each type of entity are also being discussed in the above section.You may also see inventory list examples

Inventory Assets