Accounting – 4.5 Valuation of inventory | e-Consult
4.5 Valuation of inventory (1 questions)
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Explanation: IAS 2, Inventory, requires that inventory be valued at the lower of cost and net realisable value (LCNRV). This principle is based on the matching principle, which aims to match expenses with revenues. If the cost of the inventory exceeds its net realisable value, it indicates that the inventory has likely declined in value due to obsolescence, damage, or a decrease in market demand. Therefore, it's prudent to reflect this decline in the financial statements. Applying LCNRV ensures that the carrying value of the inventory does not exceed its recoverable amount.
Accounting Treatment:
- Calculate the net realisable value (NRV) by subtracting the estimated costs of completion and disposal from the selling price.
- Compare the cost (£12,000) with the net realisable value (£10,000).
- Since the cost (£12,000) is greater than the NRV (£10,000), the inventory should be written down to its NRV.
- This will result in an impairment loss of £2,000 (£12,000 - £10,000).
- The inventory should be revalued to £10,000 on the statement of financial position.
- The impairment loss should be recognised in the profit and loss account.