FRA Inventories; inventory expense


Can someone please explain what is an Inventory expense?? Are they capitalised inventory costs or non capitalised costs that are expensed on the income statement?

I came accross this question in CFAI text, Reading 29, Page 393, Q2. Mustard PLC adheres to IFRS.It recently purchased inventory for $100Million and spent $5million for storage prior to selling the good. The amount it charged to inventory expense was closest to???


100 + 5 = 105

total amount spent to buy and store the inventory.

I can see why the phrasing of this question may be a source of confusion. If you check the answer that is given to the question, you will see that it is 100. So, ‘inventory expense’ is synonymous with capitalised inventory costs (storage costs should not be capitalised unless required as part of the production process).

Cost should include all: costs of purchase (including taxes, transport, and handling) net of trade discounts received costs of conversion (including fixed and variable manufacturing overheads) and other costs incurred in bringing the inventories to their present location and condition Inventory cost should not include: abnormal waste storage costs administrative overheads unrelated to production selling costs foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency interest cost when inventories are purchased with deferred settlement terms. hope this helps

What’s confusing about this question is that the author is confusing two ideas: cost and expense.

Cost is what you pay for something as mentioned in the post above. Expense is what you show on your income statement as a deduction against sales. The cost of inventory, for example, is paid when the inventory is purchased (or when the bill is paid, if bought on credit), but is not expensed until the inventory is sold. The cost of fixed assets is paid when the asset is purchased, but not expensed until the asset is depreciated (or amortized, or depleted). And so on.

Make sure that you have these concepts straight in your mind.

I think “storage ecpense” shall be “selling” expense, therefore, the correct answer shall be 100M.