ACCA Applied Skills · Financial Reporting

Inventories and agriculture: formula sheet

Full chapter guide

Key formulas

Measurement rule: Inventory = lower of (cost, NRV); Apply it item by item or to groups of similar items, not to the total inventory as one figure.
Net realisable value: NRV = estimated selling price − estimated costs to complete − estimated selling costs; Use costs still to be incurred only. Costs already incurred are in cost.
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.
Fixed overhead absorption: Fixed overhead per unit = fixed production overheads ÷ normal capacity; In a low-production period, do not increase the rate per unit. Unallocated overhead is an expense. In a high-production period, reduce the rate so inventory is not above cost.
Write-down: Write-down = cost − NRV (only where NRV < cost); Debit cost of sales (or profit or loss), credit inventory.
Inventory measurement: Inventory = lower of cost and net realisable value (NRV); Apply item by item or to groups of similar items, not to the total of all inventory.
FIFO closing inventory: Closing inventory = latest purchases, taken back until closing units are covered; Cost of sales takes the oldest costs first.
Weighted average cost per unit: (Cost of opening inventory + cost of purchases) ÷ (Opening units + units purchased); This is the periodic version. Under the perpetual version, recalculate after each purchase.
Net realisable value: NRV = Estimated selling price − estimated costs of completion − estimated selling costs; Compare with cost for each item.
Retail method: Estimated cost = Selling price of inventory × (1 − gross margin %); Use an appropriate margin for each department. Adjust for marked-down items.
Cost of sales: Opening inventory + purchases − closing inventory; Closing inventory errors flow straight into profit.
Measurement rule: Inventory = lower of cost and NRV; Apply to each item or group of similar items, not to the total.
Net realisable value: NRV = estimated selling price − estimated costs of completion − estimated selling costs; Use the best evidence at the reporting date, including post year-end sales.
Count after year end: Year-end inventory = count value + cost of goods sold between year end and count date − purchases received in that period (+ returns to suppliers; − sales returns at cost); Sales must be converted to cost first. Deduct only goods that you owned after year end (received and title passed after year end), because they were not yours at year end. Goods already owned at year end stay in the figure.
Count before year end: Year-end inventory = count value + purchases received after count − cost of sales after count; Use cost, not selling price, for sales.
Sales at cost from mark-up: Cost = selling price × 100 ÷ (100 + mark-up %); With a margin on sales, cost = selling price × (1 − margin as a decimal). For example, a 20% margin gives cost = 80% of selling price.
Write-down entry: Dr Cost of sales; Cr Inventory (statement of financial position) for cost − NRV; A reversal is limited to the original write-down and goes through cost of sales as a reduction.
Bearer plant definition: Living plant + used to produce produce + bears for more than one period + remote chance of sale as produce (except incidental scrap); All conditions must be met. If so, use IAS 16, not IAS 41.
Accounting for bearer plants: Cost (or revaluation) less accumulated depreciation and impairment, under IAS 16; Depreciate over useful life from when the plant is mature and ready to bear produce. Before that, costs of growing it are capitalised.
Produce growing on a bearer plant: Fair value less costs to sell (IAS 41); Changes in value go to profit or loss. At harvest, produce moves to IAS 2 at fair value less costs to sell at that date.
Unconditional grant (biological asset at fair value less costs to sell): Recognise in profit or loss when receivable; No deferral. Applies under IAS 41.
Conditional grant (biological asset at fair value less costs to sell): Recognise in profit or loss only when conditions are met; Until then, hold as a liability (deferred income).
Grants relating to bearer plants: Apply IAS 20; Treat as a grant related to an asset: deferred income or deduct from the carrying amount, then release over the asset's life.

Quick revision

Inventory is measured at the lower of cost and net realisable value.
Cost includes purchase price, import duties and non-recoverable taxes, conversion costs and other costs of bringing inventory to its present location and condition.
Cost excludes abnormal waste, general administration costs, selling costs and storage costs not needed in the production process.
NRV = estimated selling price − estimated costs of completion − estimated costs necessary to make the sale.
FIFO assumes the oldest units are used first, so closing inventory is valued at the most recent prices.
Weighted average cost uses an average unit cost, either calculated periodically or after each purchase.
LIFO is not permitted under IAS 2.
Standard cost may be used if it is a close approximation to actual cost and is regularly reviewed.
For a count before the year-end, add purchases received after the count and deduct sales made after the count, with sales at cost. For a count after the year-end, deduct purchases and add back sales at cost made between the year-end and the count.
Inventory write-downs go to cost of sales. Reversals are limited to the amount of the original write-down, so inventory is carried at the lower of cost and the revised NRV.
Biological assets are measured at fair value less costs to sell, with gains and losses in profit or loss.
Produce is measured at fair value less costs to sell at harvest, then treated as inventory under IAS 2.
An unconditional government grant on a biological asset at fair value less costs to sell goes to profit or loss when receivable; a conditional grant only when the conditions are met. Grants related to bearer plants fall under IAS 20 as grants related to assets: with the deduction method the grant is released through a lower depreciation charge, and with the deferred income method through a systematic credit to profit or loss over the plant's useful life.
Bearer plants are accounted for under IAS 16, but the produce growing on them is within IAS 41.

Common mistakes

Including selling costs or storage costs in cost. Fix: Only costs that bring inventory to its present location and condition are in cost. Selling and administration costs are expensed. Selling costs are deducted in NRV instead.
Forgetting to deduct costs to complete when calculating NRV. Fix: For WIP or partly finished goods, always deduct the costs still to be incurred to finish, as well as the selling costs.
Using LIFO because it seems logical. Fix: Remember that IAS 2 bans LIFO. Only FIFO, weighted average or specific identification (for non-interchangeable items) are allowed.
Taking the first purchases for FIFO closing inventory. Fix: Under FIFO the oldest are sold, so closing inventory is the newest batches. Work backwards from the last purchase.
Adjusting the count using sales at selling price. Fix: Always convert to cost using the mark-up or margin before adjusting.
Adding goods sold and also adding purchases when the count is after year end. Fix: Work backwards: sales add back, purchases come off. Check the direction with the timeline.
Measuring a bearer plant at fair value less costs to sell under IAS 41. Fix: Remember the 2014 change: bearer plants are in IAS 16. Only the produce growing on them is in IAS 41.
Treating all trees as bearer plants. Fix: Check the purpose. Trees grown to be felled for timber are harvested as produce, so they remain IAS 41 assets. Fruit trees that bear fruit year after year are bearer plants.

Exam tips

In OT questions, read what is asked: carrying amount of inventory, the write-down, or the effect on profit. They need different final lines.
Underline every cost in the scenario and mark it as included or excluded before calculating. Distractors are often storage, selling or administration costs.
For fixed overheads, check whether actual production is below normal capacity. If so, absorb only on actual units.
In Section C, show cost and NRV for each item in a small table-like list, then state the lower figure. Method marks are available even if one figure is wrong.
Check whether the question gives costs to complete. If it does, it is almost certainly an NRV test for WIP.
In Section A, a layered FIFO or weighted average calculation is typical. Write the batches down before calculating, because a wrong answer scores zero.
Know the permitted and banned methods. A question may ask which of four methods IAS 2 does not allow. LIFO is the answer.
In Section C, show a clear NRV comparison per product line, then the final inventory figure and the write-down charged to cost of sales.