Question

Inventory carrying values on the balance sheet are reported at the lower of cost or market. In your opinion, is this the best rationale? When you think of inventory value, which is the first method that comes to mind- what it cost you or what you could sell it for?

Answer 1

As per IAS 2, inventory valuation should be done at the lower of cost or Net realizable value ( market value). It is the best rationale as the accounting principle of conservatism requires to recognise all probable losses. Future gains should not be recognised unless fully realized or there is absolute certainty of the gains.

With the above approach of inventory valuation, any probable loss due to lower inventory value can be recognised and it is ensured that the basic accounting principle of conservatism is followed.

When we think of inventory valuation, we should consider at which value the inventory could be sold. If the inventory could be sold at more than the cost of inventory, the inventory is valued atat cost. If the inventory could be sold at lower the cost price, it should be recognised at net realizable value.