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Hi sir, for December 2018 exam question1a),
With regards to the foreign currency transactions.
In the suggested answers, why did they minus $6m from the opening balance of inventory ?
Is it because IAS 2 states that inventory should be valued at lower of cost and NRV ?
if so, why didn’t they deduct this $6m from the closing balance as well , is it because the question already mentioned that inventory at the reporting date is already correctly valued ?
I hope you don’t mind me adding to this post because I’ve also been struggling!
In relation to your question, I think its because if you didn’t adjust you would be double counting.
The movement due to FX loss ($2.7) and impairment ($3.3) is $6 in total and the question says both expenses have been included in cost of sales. So I’m assuming the following journals are included before deriving your closing inventory value of $126.
Dr Cost of Sales $6
Cr Inventory $6If you add back the add back $2.7 and $3.3 to PBT (as these are non-cash items) then you need to remove them before calculating the changes in inventory value to avoid double counting.
What I don’t understand, is why we use the closing rate to value the inventory? I thought inventory was a non-monetary item? Is this because the inventory has been impaired therefore we use the rate when it has effectively been revalued? If the inventory hadn’t been impaired I assume we would have used the historic rate?
Sam
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