Question

Prepayments for Raw material purchases, should it be part of inventories? Will it affect the cash net working capital ?

My company is paying money as advance to raw material suppliers, (7 months in advance). Will this be part of raw material inventories ? Will it affect the CNWC?

If not, Where should it be accounted?

Marc

Comments

Not part of raw material inventories as it does not yet exist. Simply debit prepayments and credit bank if this was paid.

Answer 1

No it is not part of inventories. It is simply prepayment. You debit prepayments and credit supplier as a current liability.

Comments

Thank you. Understood that it will not be part of inventory. But, as it is cash that is paid, will it affect CNWC? If yes, where is it accounted ? (Not in inventory, then, will it be adjusted in payables /receivables)? Can you send me IFRS statements showing the interpretation?

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what is CNWC? Please refer to IAS 2 inventories definition

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Cash Net Working Capital (CNWC). Our company reports this KPI and clubs physical inventories and advance payments in to inventory bucket. (CNWC = Inventories
+ External Accounts Receivables  
– External Accounts Payables) Need to know if it can be part of inventory?

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no it is not inventory

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Ok. I do agree. But in which section of CNWC calculations should the prepayment asset stated? Can you also validate this with IFRS guidelines and interpretations? Thank you. Marc

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That prepayment amount is not inventory, it's recorded into payable account (Dr)

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Thank you Jessie. Can any of you validate this info with IFRS guidelines. I need to present it to my management, and would be of great help.