## What Are Inventories?

Inventories are assets that fall into one of three categories:

Category	Description	Example
Finished Goods	Held for sale in the ordinary course of business	Ready goods in warehouse
Work in Progress (WIP)	Used in the process of production for such sale	Partially manufactured goods
Raw Materials	In the form of materials to be consumed in production	Steel, cotton, chemicals

## Scope: What AS 2 Does NOT Cover

The following are excluded from AS 2:

Excluded Item	Covered Under
WIP arising under construction contracts	AS 7
Shares, debentures, and other financial instruments held as stock-in-trade	AS 13
Producers of livestock, agricultural and forest products	IndAS 41
Mineral oils, ores, and gases	Industry-specific standards

> Tip: If a real estate developer has ready flats for sale, they ARE covered under AS 2 (construction is complete, so they are finished goods, not WIP under a construction contract).

Worked example

### Example 1

A flour mill holds wheat (raw material), partially ground flour (WIP), and packaged flour (finished goods). All three are inventories under AS 2.

A real estate company: flats under construction → AS 7 (construction contract WIP). Flats ready for sale → AS 2 (finished goods inventory).

⚠️ Common exam mistakes

Confusing manufacturing WIP (covered by AS 2) with WIP under construction contracts (excluded, covered by AS 7)
Assuming all agricultural produce is excluded — only producers' inventory is excluded; a food processor's inventory of purchased agricultural goods IS covered by AS 2
Including shares/debentures held as stock-in-trade under AS 2 — these are covered by AS 13

Bare-Act text Para 3 – Definitions · AS 2 – Valuation of Inventories · click to expand

Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

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AS 2 – Definition and Scope of Inventories

Worked example

⚠️ Common exam mistakes