The background and role of inventory in accounting

The background and role of pedigree in historyIntroduction world(prenominal)ist write up standard No.2 (IAS2) Inventory gives the rules which should be followed during the enter and submitation of inventory. Inventory refers to goods which be held by a firm for sale, argon in the production process or atomic number 18 materials which will be consumed in the production process or in giving prohibited of services. This standard does non apply to financial instruments and it gives pop a road map on how to measure an as banding which is categorized as an inventory, which concept pull in of the terms and at what term an spending occurs and the information that should be let out eyepatch preparing the financial statements (International bill Standards Board, 2008, p.977).HistoryIn the year 1974 during the write of standard, the name was changed to inventories from valuation and face upation of Inventories in the Context of the Historical follow System the first draft was affected on 1st of January in the year 1995 and this was 21 years after the first draft exposure. On 18th of December 2003, the standard was revised and took effect as from the strart of January 2005. In the year 2003, on that point was a revised IAS 2 whereby polar price formulas for inventories were incorporated into the standard. These were superseded from coif 1 on consistency.On December 1997, SIC 1 was issued and was effective as from 1st January 1999. sic 1 involve that that the aforesaid(prenominal) cost formula was to be used for inventories with the same characteristics chthonic IAS 2.21 AND IAS 2.23. in that case, different methods may be used where inventory items were different from different(a) groups (International Accounting Standards Board, 2008, p.978).SIC stands for Standing International Committee (SIC), and it was renamed to International Financial Reporting Issues Committee (IFRIC). some of the issues in SIC were not added in IFRICs Agenda. This are as followsIAS 2 Cash DiscountsThe question was whether money discounts received should be subtracted from the cost of goods purchased. A decision was made in august of the year t 2002 that they should not be added. The reason accustomed by IFRIC was that paragraph 8 of IAS 2 provided enough guidance and hencely it was not necessary to publish on the interpretation on the issue.IAS 2 Consumption of inventories by service organizationsThe problem was on how to treat utmost realizable value when the inventory is consumed as part of the service rendered. A decision was made in the march of 2004 that it should not be added. It was notable that it existed for commercial bodies. It was thus concluded that the matter involved the recoverability of an as bewilder which did not have a direct cash flow.IAS 2 Discounts and rebatesIn this part, trine questions were considered, first, should the discount received for prompt payment of invoice be reduce from the cost of the inventories or seen as financing income? Second, should all other rebates be reduced from the cost of inventories or treat some of them as revenue enhancement or diminution in promotional expenses, lastly, if volume rebates should be addicted a recognition only when threshold volumes are achieved. The decision arrived at on November 2004 was not to add.Objective of IAS 2IAS 2 has the objective of of prescribing how inventories should be treated in explanation. It provides a guideline on how to look for the cost of inventories and how to recognize an expense including all depreciation to pay realizable value. It provides the formulas that should be used to assign costs to inventories. The conclusion is that, inventories should be measured at the dismantle between net realizable value and cost (Nikolai, Bazley, And Jones, 2009, p.80). bring in realizable value refers to the estimated selling price in the course of sane business less the costs estimate for completing and the estimated cos ts mandatory to finish the selling activity. The cost of inventory on the other flip over shall comprise of all the costs of purchase, conversion in addition to other costs which are incurred in making the conditions to be in their present condition and into their present location.The standards require that the first in first out method is used in assigning the cost of inventories or the dull average method. The same cost formula should be used by a firm for all similar stock and stock that has the same use to the firm. Where the inventories top executive have different use or are of different nature, different cost formulas loafer be used (Nikolai, Bazley, And Jones, 2009, p.80).Where inventory is sold, the expenses incurred during the sale of the inventory shall be seen as an expense in that stream when the expense occurred. Amount realized from any reversal of a expense in inventories coming up from a rise in net realizable value shall be treated as a reducing in add of in ventories recognized as an expense in the time or period when that reversal took place.RationaleThe rationale for IAS 2 is to realise that accounting for inventories is done in a manner which leads to the representation of the square value of the available inventory. It ensures that frequent research is done on how to present inventory in the financial statements.Measurement, presentation and disclosure details on that point are several items which need to be disclosed in the financial statements concerning inventory. One of the items that need to be disclosed embroils the accounting policies that were leaseed while giving value to the inventories. This includes the formula used to value the stock. In other words, the financial encompass should state whether first-in, first-out method was used or dull average method was used. Secondly, the reports should show the total carrying amount for the inventories and they should be put option into a classification which the entity feel s fit. Thirdly, the carrying amount for the inventories that may be accounted for basing on their logical value minus the sale costs should also be clear shown by the financial statement.The fourth thing that should be disclosed is the direct of inventories recognized as an expense in that certain period. Following this, the aim of inventory write-downs which might have been seen as an expense in the financial period should be shown. After this, the level of reversals for the previous value write-downs which may have been achieved as a reduction in the amount of the expense on account of the periods inventories. The activities which led to reversal should also be listed and finally, the carrying amount of inventories used as security for debt payment should also be shown (Barry and Eva, 2008, p.27). proportion with US GAAP (inventory)As suggested, IAS is an initioal for International Accounting Standards and it represents a set of accounting standards which are set by the inter national Accounting standards citizens committee (IASC) which is in London, England. IASC has several bodies with the main one being the international Accounting Standards Board (IASB). IASB is responsible for setting standards for IASC. On the other hand, GAAP is an acronomy for chiefly Accepted Accounting Principles. IASC is not responsible for setting GAAP and it thus does not have any legal authority over it. IASC can be thus be seen as an influential body which makes accounting rules. Many people listen to what IASB and IASC say on accounting matters (Barry, Nach, and Bragg, 2009, p.1337).When an accounting rule is set by IASB, several countries consider the rule and adopt it into its accounting system. The rules thus will eventually influence of what each rural adopts as its GAAP. To understand what GAAP is better, we can say that it is a set of rules which accountants follow in their countries as each country has its own GAAP. in that respect are however not much differen ces in GAAP between countries although their interpretations may vary between different countries. In the United States, there is the Financial Accounting Standards Board (FASB), and this make up the rules which eventually rick GAAP for the country.Example from annual reportsAn example of an annual report which shows the usage of IAS 2 inventory is shown in the appendix. The report shows the consolidated financial statements for prestigiousness Brands Holdings, Inc. which is a distributor and marketer of brand name through the restitution drug, personal and household products which are sold through Canada, U.S. and other international markets.DiscussionIn the consolidated financial statements for the mentioned company, the first requirement for the IAS 2 has been met whereby the accounting policy that was used has been mentioned The reports states that the inventories have been stated at the lower of between the fair value and cost. The report has gone further to mention that th e first-in, first-out method was used in valuing the inventory. The reports have explained that the company provides allowance for the goods which are slow moving and inventory which has become obsolete through the reduction of inventory for fall in value due to the obsolescence of products, damage and any other issues which might be affecting the marketability, equal to the difference that might exists between the cost of the inventory and its market value.Another thing that the report discloses is the factors which have been utilized in the determination of estimated market value and they include current sales data and historical return rates, the estimates for demand in future, the competitive pricing pressures, introduction of new production, expiration dates of products and obsolescence of components and packaging.