ACCA Applied Knowledge · Financial Accounting

Inventories: formula sheet

Full chapter guide

Key formulas

Measurement rule: Inventory value = lower of (cost, NRV); Apply it item by item, or to groups of similar items. Do not compare totals.
Net realisable value: NRV = estimated selling price − estimated costs to complete − estimated selling costs; Selling costs include commission, packaging for sale and delivery to the customer if the seller pays.
Cost of inventory: Cost = purchase costs + conversion costs + other costs to bring to present location and condition; Purchase costs are net of trade discounts and rebates. Settlement discounts are not deducted in the cost rules you need here unless the question says otherwise.
Costs excluded from inventory: Excluded: abnormal waste, general storage, administrative overheads, selling costs; These are expensed in the period they occur.
Write-down: Write-down = cost − NRV (only where NRV < cost); Charged to profit or loss, normally within cost of sales.
FIFO: Issues are costed at the oldest unit costs first; closing inventory is costed at the latest purchase prices; Work through the purchase layers in date order, using up the oldest layer before the next.
AVCO (continuous): Average cost per unit = (Cost of units in stock + Cost of new purchase) ÷ (Units in stock + Units purchased); Recalculate after every purchase. Issues do not change the average, they only reduce units and total value.
AVCO (periodic): Average cost per unit = Total cost of opening inventory and purchases ÷ Total units of opening inventory and purchases; Use only when the question asks for one average for the period.
Closing inventory check: Opening inventory + Purchases − Cost of goods sold = Closing inventory; Use this to check your answer. Whatever method you use, the total must reconcile.
Lower of cost and NRV: Inventory value = lower of cost and net realisable value (NRV); NRV = estimated selling price − estimated costs to complete − costs necessary to make the sale. Apply it item by item.
LIFO: Not permitted under IAS 2; Do not use it for a financial reporting answer.
Cost of sales (periodic system): Cost of sales = Opening inventory + Purchases − Closing inventory; Purchases means net of returns and including carriage inwards. Closing inventory comes from the count.
Expected inventory (perpetual record): Record balance = Opening balance + Receipts − Issues; Compare this to the physical count to find the difference.
Inventory difference: Difference = Physical count − Record balance; A negative figure is a shortage (loss). A positive figure is a surplus.
Count date to year-end adjustment: Count before year end: Year-end inventory = Count-date inventory + Purchases after count date − Cost of sales after count date. Count after year end: Year-end inventory = Count-date inventory − Purchases since year end + Cost of sales since year end.; Check whether the count is before or after the year end first. Before year end, add purchases and deduct cost of sales made after the count date. After year end, deduct purchases and add back cost of sales made between the year end and the count date. Convert sales to cost using the gross margin or mark-up.
Cost from sales: Cost = Sales × 100 ÷ (100 + mark-up %), or Sales × (100 − margin %) ÷ 100; Needed to turn sales values into cost when adjusting a count date.
Cost of sales: Cost of sales = Opening inventory + Purchases (net of returns, plus carriage inwards) − Closing inventory; Carriage inwards and import duties are part of cost of purchases. Carriage outwards is a distribution expense, not cost of sales.
Gross profit: Gross profit = Revenue − Cost of sales; An error in closing inventory changes gross profit and net profit by the same amount.
IAS 2 measurement: Inventory = lower of cost and NRV; Apply to each item or group of similar items, not to the total in aggregate unless items are similar.
Net realisable value: NRV = Estimated selling price − Costs to complete − Selling costs; Use the cost to complete only if the goods are unfinished.
Count date roll-forward: Year-end inventory = Count-date inventory + Purchases (at cost) after count − Sales after count (at cost); If the count is before year end. If the count is after year end, reverse: subtract later purchases and add back later sales at cost.
Cost from selling price: Cost = Selling price × 100 ÷ (100 + mark-up %) or Selling price × (100 − margin %) ÷ 100; Use mark-up if profit is stated as a percentage of cost. Use margin if it is a percentage of selling price.
Write-down entry: Dr Cost of sales; Cr Inventory (with the write-down amount); In practice this is done by reducing the closing inventory figure to the lower value.

Quick revision

IAS 2: measure inventory at the lower of cost and net realisable value.
Apply the lower-of rule to each item or group of similar items, not to the grand total of all inventory.
Cost includes purchase price, non-recoverable taxes, conversion costs and other costs to bring items to their present location and condition.
Exclude abnormal waste, selling costs, administrative overheads and storage that is not part of production.
NRV = estimated selling price − estimated costs to complete − estimated costs to make the sale.
FIFO assumes the oldest items are sold first, so closing inventory is valued at the most recent prices.
AVCO uses a weighted average cost: total cost of units available ÷ total units available.
IAS 2 does not permit LIFO.
When prices rise, FIFO gives higher closing inventory and higher profit than AVCO.
Cost of sales = opening inventory + purchases − closing inventory.
A count on a different date must be adjusted for receipts and issues between that date and the year end.
Inventory valued too high increases profit; valued too low decreases profit.

Common mistakes

Including selling or distribution costs in the cost of inventory. Fix: Only costs that bring inventory to its present location and condition count. Delivery to customers, admin and general storage are expenses.
Using selling price instead of NRV. Fix: Always deduct costs still to complete and costs to sell before comparing with cost.
Taking the closing inventory under FIFO from the oldest purchases instead of the latest. Fix: Under FIFO the oldest units are sold, so what is left is the newest. Build closing inventory from the last purchase backwards.
Using a simple average of unit prices, for example (₹10 + ₹12) ÷ 2. Fix: Weight the average by quantity. Divide total cost by total units.
Treating a periodic system as if it keeps a running balance Fix: Remember: periodic means a count at period end, and cost of sales is a calculated figure. Only perpetual keeps a running record.
Skipping the physical count because perpetual records exist Fix: Records show what should be there. The count shows what is there. Both are needed, and the count is the check.
Adjusting for sales after the count date at selling price Fix: Convert to cost first. Cost = selling price × 100 ÷ (100 + mark-up %), or selling price less the margin.
Adding purchases after the count date when the count was after the year end Fix: Draw a timeline. If the count is after year end, remove later purchases and add back later sales at cost.

Exam tips

Read what is being asked: closing inventory value, write-down amount, or effect on profit. Many wrong answers are right calculations of the wrong figure.
Cross out costs that IAS 2 excludes before you add anything: admin, selling, abnormal waste and general storage.
In multiple response questions, check each statement against the rule: lower of cost and NRV, never above cost, item by item.
For number entry, show your workings on scratch paper and enter only the final figure in the format asked.
Read the method in the question. Questions on this topic often test FIFO and AVCO side by side, so do not mix them.
In multiple-choice questions, do the arithmetic once, then use the check: total cost available − closing inventory = cost of sales.
Under AVCO, keep at least four decimal places during working and round only the final answer.
If a multiple-response question asks which statements are true, remember: LIFO is not permitted by IAS 2, and in times of rising prices FIFO gives a higher profit than AVCO.