I. What is inventory?
A. Inventory is assets held for sale or assets used to produce goods that will be sold
as part of the entity’s normal business activities.
B. Three subcategories:
1. Raw materials: the inputs into the production process
2. Workinprocess or WIP: inventory that is partially completed on the
financial statement date. E.g. a partially completed car for a car
3. Finished goods: inventory that has been completed and is ready for sale.
One entity’s inventory is another’s equipment, and one entity’s finished
good is another’s raw material.
II. What do IFRS say?
A. NRV (net realizable value): the amount the inventory could be sold for, less
selling costs. (Aka the lower of cost and NRV rule)
1. Includes all costs incurred to ready the inventory for sale or use
2. IFRS require that the cost of inventory include the cost of materials used + the 1
cost of labor directly used to produce the product + an allocation of overhead
incurred in the production process
3. IFRS don’t provide specific directions for determining which costs and how
much of them should be included. Therefore, different entities can determine
the cost of inventory differentl2.
4. Costs that should be excluded : storage, administration (headoffice costs),
selling and marketing, and waste.
5. What and when items should be included in inventory:
1) It is possible for a business to hold goods that shouldn’t be included in
inventory and may not have possession of goods that should be.
→ Goods on consignment are reported in the inventory of the
manufacturer/distributor, not in the inventory of the seller.
→ Goods in transit should be included in the inventory of the buyer if
title has transferred the good have been sold.
→ If the transfer occurs when the goods are given over to a shipping
company , then the buyer includes them in inventory when they’re
→ If the title transfers on deliveryFOB destination the inventory
remains on the books of the seller until they’re received by the
III. Perpetual and periodic inventory control systems
A. Perpetual inventory control system
1 Overhead: the costs in a manufacturing process other than direct labor and direct materials. E.g. when making a
chair, the cost of the materials and the amount of the worker is paid is directl