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CMA Intermediate · Corporate Accounting and Auditing

Inventories (Ind AS 2) for CMA Intermediate

Ind AS 2 says inventories are measured at the lower of cost and net realisable value (NRV). Cost includes purchase, conversion and other costs to bring stock to its present location and condition. Use FIFO or weighted average for interchangeable items. Compare cost with NRV item by item, and write down any shortfall as an expense.

What this chapter covers

This chapter covers how a company values its closing stock and what it carries in the balance sheet. Ind AS 2 defines inventories as assets held for sale in the ordinary course of business, assets in production for such sale, and materials or supplies to be used in production or in rendering services. It then sets one measurement rule: lower of cost and net realisable value.

Most of the chapter is about working out cost correctly. You decide what goes into cost (purchase price, import duties and non-refundable taxes, freight, conversion costs with a systematic share of fixed production overheads) and what stays out (abnormal wastage, storage after production unless needed in the process, administrative overheads, selling costs). Then you apply a cost formula: specific identification for distinct items, and FIFO or weighted average for interchangeable items. Standard cost and the retail method are allowed as techniques if the result approximates cost.

In Paper 10 this chapter links to preparation of company financial statements under Schedule III, where closing stock appears under current assets. It also links to cost accounting from Paper 8 (overhead absorption, normal capacity) and to auditing, where stock verification and valuation are common audit areas. Expect it to appear as a numerical problem and as short MCQs on definitions and inclusions.

Inventories is a compact chapter with clear rules, so it is one of the easier places to score full marks in Paper 10. The numerical problems follow a few repeatable patterns: build up cost, apply FIFO or weighted average, compare with NRV, and compute the write-down. The MCQs test definitions and what is included or excluded from cost, which you can master by memory and practice. Errors here also carry into profit and the balance sheet, so the skill helps in other company accounts questions too.

Inventories (Ind AS 2): topics in the order to study them

  1. 1Scope and Definitions under Ind AS 2You need the terms inventories, NRV and fair value before any rule makes sense, and you must know what Ind AS 2 does not cover.
  2. 2Measurement of Inventories: Cost and NRVThe lower of cost and NRV rule is the core of the standard, so learn it before the detail of how cost is built.
  3. 3Cost of Inventories: Purchase, Conversion and Other CostsOnce you know the rule, learn what goes into cost and what is excluded; this drives most numerical problems.
  4. 4Cost Formulas and Techniques: FIFO, Weighted Average, Standard CostCost formulas assign cost to units on hand, and they need the cost components from the previous topic.
  5. 5Recognition as Expense, Disclosures and Practical ProblemsThis pulls everything together: write-downs, reversals, expense recognition, disclosures and full problems.

How to prepare Inventories (Ind AS 2)

Aim to learn the rules once, then drill problems until the layout becomes automatic.

  1. Read the definitions and scope and write each in one line of your own words. Note what is outside scope, such as financial instruments and biological assets.
  2. Learn the lower of cost and NRV rule and practise computing NRV as estimated selling price less estimated costs of completion and costs necessary to make the sale.
  3. Make two lists: costs included in inventory and costs excluded. Revise them until you can recall them without notes.
  4. Solve FIFO and weighted average problems on the same data and compare closing stock values. Note how the profit changes when prices rise or fall.
  5. Practise overhead allocation: fixed overheads are absorbed on normal capacity, and unallocated overheads are expensed in the period.
  6. Do NRV comparison item by item with a clear table: cost, NRV, lower value, write-down. Also practise reversal when NRV later recovers, limited to the original write-down.
  7. Finish with the disclosure points and a few past-style MCQs, then time yourself on one full written problem.

Common mistakes in Inventories (Ind AS 2)

  • Including selling and administrative costs in the cost of inventory.

    Fix: Only costs of bringing stock to its present location and condition are included. Selling and general administrative costs are expensed.

  • Comparing total cost with total NRV instead of item by item.

    Fix: Compare each item or group of similar items, take the lower value for each, then add up. Show the table.

  • Absorbing fixed overheads on actual output when output is abnormally low.

    Fix: Absorb fixed overheads on normal capacity. Expense the unabsorbed portion. In abnormally high output, reduce the rate so stock is not above cost.

  • Deducting only the selling cost when computing NRV and ignoring completion costs.

    Fix: For partly finished goods, deduct both estimated costs of completion and costs necessary to make the sale.

  • Using LIFO or mixing formulas for similar items.

    Fix: LIFO is not allowed. Use the same cost formula for all inventories of similar nature and use.

  • Reversing a write-down above the original cost.

    Fix: After reversal, the carrying amount is the lower of cost and the revised NRV, so the reversal cannot exceed the original write-down.

Last-day revision: Inventories (Ind AS 2)

  • Inventories are held for sale, in production for sale, or as materials to be consumed in production or services.
  • Measure at the lower of cost and NRV.
  • NRV = estimated selling price − estimated costs of completion − estimated costs necessary to make the sale.
  • Cost includes purchase cost, conversion cost and other costs to bring inventory to present location and condition.
  • Purchase cost: price, import duties and non-refundable taxes, transport, handling, less trade discounts and rebates.
  • Excluded from cost: abnormal waste, storage costs not needed in production, administrative overheads, selling costs.
  • Fixed production overheads are absorbed on normal capacity; in low output, the unabsorbed amount is an expense.
  • Use specific identification for items not interchangeable; otherwise FIFO or weighted average. LIFO is not permitted.
  • Standard cost and retail methods may be used only if results approximate cost.
  • Write-downs to NRV are usually made item by item; reverse them if NRV recovers, but only up to the original write-down.
  • Carrying amount of sold inventory is expensed in the period the related revenue is recognised.

Inventories (Ind AS 2) practice questions

Inventories (Ind AS 2) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Inventories (Ind AS 2): frequently asked questions

Is Ind AS 2 important for CMA Intermediate Paper 10?

Yes. It is a focused chapter with clear rules and repeatable numerical patterns. You can use it for both MCQs and a written problem on valuation.

Which cost formulas are allowed under Ind AS 2?

Specific identification applies to items that are not ordinarily interchangeable. For interchangeable items you use FIFO or weighted average. LIFO is not allowed.

How do I calculate NRV?

NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Then compare it with cost and take the lower.

Can a write-down of inventory be reversed?

Yes. If the circumstances that caused the write-down no longer exist or NRV has clearly increased, you reverse the write-down. The reversal is limited to the amount originally written down.