33.3 Inventory valuation

How should inventories be valued on the business statement of the financial position?

Inventories should be recorded at their purchase price or their net realizable value. NRT is only recorded when it's estimates to be lower than the historical cost.

Net Realizable Value

A process used to evaluate assets like inventories. It represents the value for which inventory can be sold minus the estimated costs associated with selling that asset and ensures that the value of the inventory isn't overstated (more than the true/correct value).

Formula:

1. Expected selling price: number of units produced x the unit selling price

2. Total production and selling costs

1 - 2 = NRV

Problems with valuing inventory

1. Out of fashion

2. Damaged

3. Never be sold

4. Value might be different every other day

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