QUESTION $5$

a$)$ Explain the term "inventories" as defined by IAS$2$ Inventories.

$(2$ marks$)$

b$)$ Under IAS$2,$ which 'elements of cost$\text{'}$ should be included in cost of inventories. Identify

those items that should not be included in the cost of inventories.

$(3$ marks$)$

c$)$ Explain the term "net realisable value" in relation to inventories.

$(2$ marks$)$

d$)$ Nelson Ltd buys used machines which it reconditions and sells on to customers. At $28$ Febru$-$

ary $2022,$ the end of the company's financial year, Nelson Ltd had the following machines

that were at various stages in the process of being reconditioned to be ready for sale.

Notes:

Selling expenses are expected to absorb $6\%$ of the expected selling price.

A fifth of the reconditioning costs relate to materials, but $20\%$ of the cost of materials used

in the reconditioning is considered to be abnormal wastage, due to a poor$-$quality type of

materials that has been used.

In an attempt to reduce the abnormal wastage of materials, material A has been used by the com$-$

pany since $5$ January $2022,$ when $30$ Kilos were purchased for a total cost of $600.$ Subsequent pur$-$

chases and usage of this material were as follows:

Required:

i$)$ Explain why it is not permissible to value the inventory of machines as at $28$ February $2022$

at their total purchase price $51,000$ or at their total selling price of $62,500.$

$(1$ mark$)$

ii$)$ Compute the value at which the inventory of machines as at $28$ February $2022$ should be

shown in the final accounts of Nelson Ltd$.$

$(8$ mark$)$

iii$)$ Calculate the total cost of material A that has been used and the cost of the inventory of

this material as at $28$ February $2022,$ using each of the following cost formulas:

First$-$in$,$ first$-$out $($FIFO$)$

Weighted average cost $($AVCO$).$

$(8$ marks$)$

$($Total for part d$)$: $17$ marks$)$

TOTAL $25$ MARKS

To ensure the correct valuation of the company's inventories is reflected in the final accounts, the

company follows the guidance provided in IAS$2$ Inventories.