The Basis of the Valuation of Inventory

Cost & net realisable value

Cost & net realisable value

What is the cost and net realisable value of inventory?

• The cost of inventory is the total cost to the business of obtaining goods

  • The purchase cost of the goods

  • Plus the cost for carriage inwards

• The net realisable value (NRV) of inventory is the net amount the business is likely to receive when selling the goods

  • The selling price of the inventory 

  • Minus any selling expenses

    • Such as the cost of repairing damaged goods

What is the basis for the valuation of inventory?

• Inventory is valued at the lower value between:

  • The cost

  • The net realisable value

• This method of valuation complies with the accounting principle of prudence

  • The value of the inventory (asset) is not overstated

  • The profit is not overstated

• For most inventory, the cost will be the lower of these values; however, there are some exceptions

  • Damaged goods might need to be repaired before they can be sold

  • Goods that are close to their expiration date might need to be sold at a lower price

  • The business might use lower prices to promote new products

Inventory valuation statements

Inventory valuation statements

What is an inventory valuation statement?

• An inventory valuation statement shows the total valuation for the inventory of a business

• These are useful when a business sells different types of goods

• There is no fixed format, however, a table is normally used

• The statement should show:

  • The name of each type of good

  • The cost of each item

  • The net realisable value of each item

  • The quantity of each type of goods

  • The total value of each type of goods

  • The overall value of the goods