IFRS for SMEs) IFRS for SMEs Inventory and Cost 1 — Questions and Answers
Question 1: Under IFRS for SMEs, which cost formula is NOT permitted for measuring inventory?
- FIFO (First-In, First-Out)
- Weighted average cost
- LIFO (Last-In, First-Out) (Correct answer)
- Specific identification
Correct answer: LIFO (Last-In, First-Out)
IFRS for SMEs prohibits the use of the LIFO cost formula for inventory measurement.
Question 2: Under IFRS for SMEs, inventory is measured at the lower of:
- Cost and net realizable value (Correct answer)
- Cost and fair value
- Fair value and replacement cost
- Net realizable value and replacement cost
Correct answer: Cost and net realizable value
Section 13 of IFRS for SMEs requires inventory to be measured at the lower of cost and net realizable value.
Question 3: Which costs are included in the cost of inventories under IFRS for SMEs?
- Purchase price plus import duties and conversion costs (Correct answer)
- Purchase price only
- Selling and distribution costs
- Administrative overhead only
Correct answer: Purchase price plus import duties and conversion costs
The cost of inventories includes purchase costs (including import duties and non-refundable taxes) and conversion costs.
Question 4: Under IFRS for SMEs, abnormal waste of materials in production should be:
- Excluded from the cost of inventories and recognized as an expense (Correct answer)
- Included in conversion costs
- Added to prime costs
- Deferred until the inventory is sold
Correct answer: Excluded from the cost of inventories and recognized as an expense
Abnormal amounts of wasted materials, labor, and other production costs are excluded from inventory cost and recognized as expense in the period incurred.
Question 5: How does IFRS for SMEs require an entity to account for a write-down of inventory to net realizable value?
- Recognize as an expense in the period the write-down occurs (Correct answer)
- Defer the loss until the inventory is sold
- Record as a direct reduction in equity
- Capitalize as part of cost of goods sold
Correct answer: Recognize as an expense in the period the write-down occurs
Under IFRS for SMEs Section 13, write-downs of inventory to net realizable value are recognized as an expense in the period.
Question 6: Which of the following is NOT included in the cost of purchase of inventory under IFRS for SMEs?
- Trade discounts received (Correct answer)
- Import duties
- Non-refundable purchase taxes
- Freight and handling costs
Correct answer: Trade discounts received
Trade discounts and rebates are deducted in arriving at the cost of purchase, so they are not included in inventory cost.
IFRS for SMEs) IFRS for SMEs Inventory and Cost 1
Under IFRS for SMEs, which cost formula is NOT permitted for measuring inventory?